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1 msci.com
Fund ESG TransparencyQuarterly Report 2021Q1 Spotlight: ETFs
Rumi MahmoodMSCI ESG Research LLC
Inside Left
2 msci.com
Contents
Executive Summary3
Product Success by AUM10
Spotlight: ETFs6
MSCI ESG Quality Scores and Ratings11
Board Governance and Female Participation18
MSCI ESG Fund Ratings Universe5
ESG Attributes11
Carbon Exposure16
Global Landscape7
The E, S and G13
Global Norms20
3 msci.com
1 Source:Refinitiv/LipperandMSCIESGResearch,LLCasofDec.31,2020
2 1https://www.msci.com/documents/10199/b3d456db-353a-4eea-8f08-c12447427940
3 http://www.theventure.com/global/en/trends/how-millennials-are-driving-impact-investing
4 UNCTAD-LeveragingthePotentialofESGETFs
ESG investing is on the rise globally. Where once ESGfactorsweresupplementaryconsiderationsinportfolioconstructionandassetallocation,theyareincreasinglybecomingacorepartoffundamentalanalysis.Inrecentyears,ESGinvestinghasbeenfacilitatedbyagrowingsupplyofESGfunds.Theriseandadoptionoftheseproductsreflectaparadigmshiftinglobal attitudes across market participants, andagrowingrecognitionthatESGfactorsarefinanciallymaterial,transcendingtheirusejustforsecuritiesselectiontoreachfund-levelapplicationaswell.
ThisyearwewillbereleasingquarterlyreportsanalyzingtheuniverseoffundswithinourcoverageusinganESGlens.Inthefirstofthisseries,weassessedthelandscapeofequityandbondexchange-tradedfunds(ETFs),whichhave been under a considerable spotlight asindex-basedinvestingcontinuestogainmomentumeachyear.Insubsequentreports,wewillcoverequityandbondmutualfunds,alongwithofferinganumberofcomparativepiecesanalyzingdifferentfundstrategies.
Globally,ETFswerepopularasavehicleofchoiceforinvestorsin2020,withrecordinflowsinexcessofUSD700billion1, putting the current
globalAUMinETFsatUSD7trillion.ESGETFstrategiesalsosawrecordinflowsin2020aswell,drivenbydemandfromassetownerslookingtoincrease ESG integration and transparency across theirportfolios.2 This demand is expected to rise in the years to come.3
ETFs are highly transparent and very accessible to marketparticipantsrelativetootherfundvehicles.Theyalsousewell-definedregulatoryguidelines.4 These attributes compliment those promoted byESGinvesting.AlongsidethegrowthinETFassets,theirfunctionasanESGintegrationtoolininvestors’portfoliosisalsobecomingmoreestablished. With that in mind, it’s important to examinetheESGcharacteristicsoftheproductuniverse,thusenablingmore-informedfundselectiondecisionsforinvestorsandproductissuersthatmaywanttoachievespecificESGoutcomes.Inthisreportwelookthroughan ESGlensacrosstheuniverseofETFswithinMSCI’s coverage.
Executive Summary
4 msci.com
» In2020,ESGETFssawnetflowsinexcessofUSD75billion,morethan three times the prior year, or approximately10%ofoverallETFnetflowsglobally.ItwasalsoagrowthyearfornewESGETFproducts,withmorethan120being launched globally.
» EuropeledtheworldintheavailabilityofESGETFsandthepaceofproductlaunches,withover50%ofglobalESGETFs being domiciled in Europe. European investors demonstratedaclearpreferencetowardvalues-andscreens-basedESGETFs,inwhichinvestorvalues/preferencesarealignedwithgeneratingfinancialreturns.NorthAmericaofferedmorechoiceinintegration-basedESGETFs,alongwiththematicapproaches.
» Globally,thehighest-AUMESGETFs(USD1billionandabove)predominantly employed values andscreensapproaches,withmost domiciled in Europe. The geographicfocusofthemajorityoftheseproducts,however,wastheU.S.CleanenergywasapopularthemewithinvestorsintheU.S.andEurope,withthetop-fiveETFs(byassets)thattrackclean energy indexes holding overUSD18billioninassets.
» Europe also led on ESG performance.ETFswithEuropeanexposure demonstrated higher ESGratingsrelativetothosewithother geographic exposures. Globally,60%ofAAA-rated5equityETFsand58%ofAAA-ratedbondETFstrackedindexeswithaEuropeanfocus.Notably,therewerenoEuropeanETFsthatwereESGlaggards5ineitherequityorfixedincome.
» ThereisroomforproductexpansioninNorthAmerican-andAsian-focusedETFs,whereinvestorswouldbehard-pressedtofindanESGETFthatisratedas a leader. From a possible 1,349NorthAmerican-focusedequityETFs,only76ofthem(5.6%)areleaders,withoptionsbeingevenmorelimitedforinvestors targeting Asia.
» ETFswithafocusontheAsianmarketsoverwhelminglyaccountedfortheESGlaggardfunds.ThisisprimarilyduetoAsiancorporations(largelyoperatinginemergingmarkets)generally being in the early stagesofimplementingsustainability considerations into their business practices relative to their Western peers.
» Globally,mostETFs(58%)exhibited a moderate Weighted AverageCarbonIntensity(WACI)ofbetween70tonsto250tonsCO2equivalent/USDMillionSales.ETFswithanemergingmarketfocusonaverageexhibitacarbonintensityalmosttwice(x1.65)thatofdevelopedmarket-focusedETFs.
» ThemajorityofETFsgloballydid not have exposure to any holdings that violated UN Global Compactprinciples;over50%ofbothequityandbondETFswerefullycompliant.Thesmallsubsetoffundsthatexhibithighviolationswerefocusedonextractive industries such as energy, metals and mining.
Key Takeaways:
5TheMSCIESGRatingforfundsis designed to measure the resiliencyofportfoliostolong-term ESG risks and opportunities. Thehighest-ratedfundsconsistofissuerswithleadingorimprovingmanagementofkeyESGrisks.The ESG Rating is calculated as a directmappingofESGQualityScores to letter rating categories. TheESGRatingsrangefromleader(AAA,AA),average(A,BBB,BB)tolaggard(B,CCC).
Inside Left
5 msci.com
Source:MSCIESGResearchLLCasofDec.31,2020
UnderstandingtheESGcharacteristicsofafundbeginswithevaluatingitsunderlyingsecurities.Thiscan be done using the MSCI ESG Fund Ratings tool thatexamines,ranksandscreensfundsbasedontheirexposuretoarangeofESGcategories.ThetoolallowsuserstosearchfundsbasedontheirESGRatings,peerandglobalrank,andtheESGRatingsoftheirunderlyingholdings.Userscanalsosearchforfundsusingspecificmetrics such as green revenues, carbon intensity, governancefactorsandsocialsafeguards.
MSCIESGResearchleveragesESGRatingsformorethan8,500companies(14,000totalissuersincludingsubsidiaries)andmorethan680,000equityandfixedincome securities globally to create scores and metrics forover53,000mutualfundsandETFsglobally(asofDec.31,2020)initscoverageuniverse.
In order to be included in the MSCI ESG Fund Ratings universe,afundmusthavethefollowingcriteria:
» Aminimum65%ofthefund’sgrossweightmustcomefromcoveredsecurities
» Reportedfundholdingsmustbelessthan1yearold
» Thefundmustholdatleast10securities.
MSCI ESG Fund Ratings are designed to provide greaterexaminationandunderstandingoftheESGcharacteristicsoffundsavailabletoinvestors.AsthenumberofESGfundsproliferatesandESG-orientedinvestmentstrategiesareadoptedbywealthandfundmanagers,westrivetohelpinvestorsbetterunderstandtheir ESG risks and opportunities. Transparency helps investorstomakebetter,more-informeddecisions.Inthiseffort,MSCIESGResearchLLChasmadeESGFundRatings publicly available online.
MSCI ESG Fund Ratings Universe
Exhibit 1: Global Coverage of Funds
By Asset Universe
By Asset Class
53,000+Individual Funds
192,000Fund Share Classes
Individual Funds Share Classes
Mutual Funds 38,704 161,666
Insurance Funds 4,874 14,318
Exchange-TradedFunds 4,979 6,654
Pension Funds 4,970 9,160
Closed-EndFunds 259 264
Investment Trusts 103 108
Hedge Funds 17 38
Fund Portfolios Share Classes
Equity 27,105 95,894
Bond 11,176 47,796
Mixed Assets 13,913 40,919
Money Market 865 4,253
Alternatives 793 3,261
Real Estate 11 22
Other 43 63
6 msci.com
Source:Refinitiv/Lipper and MSCI ESG Research, LLC asofDec.31,2020
Exhibit 2: Global ESG ETF Growth 2015 – 2020
Thegrowthinindex-basedinvestingthroughETFshascomplementedESGadoption.WithtransparencyasoneofETFs’corefeatures,theconsistencyofindexmethodologiescangiveESGinvestorsinformationnecessarytobuildportfoliosolutionsthatstaytruetotheiroverallaims.Furthermore,thedailytransparencyofholdingsresonateswithESG-attunedinvestorsthatarehighlyengagedintheirassessmentofunderlyingriskandexposures.Overthepastfiveyears,equityESGETFshaverecordedasubstantialuptickinflows,withassetsundermanagementgrowingby25timessince2015:fromjustoverUSD6billiontooverUSD150billionattheendof2020.In2020alone,ESGETFssawexceptionalflowsinexcessofUSD75billion,morethanthreetimestheyearbefore,orapproximately10%ofoverallETFflowsglobally.
Spotlight: ETFs
7 msci.com
Globally,thetotalnumberofETFsrosetoover7,000in2020,ofwhichmorethan70%arecoveredbyMSCIESGResearch.While assets under management in ESG ETFsareontherise,theystillaccountforaonlyfractionofallETFholdings:410fundsglobally,orjustover5%.ESGETFsareidentifiedasthosethathaveadoptedinvestmentpolicies(index-mandatedorotherwise)thatconsidersomeESGcriteria,6 having broad, thematic or exclusionary ESG policiesoranycombinationofthethree.Themajority(over90%)oftheseESGETFsfallwithinMSCIESGResearch’scoverage.
ThebulkofESGETFsgloballyareequityfunds,accountingforapproximately80%ofproducts,whilebondESGETFsremainatanascentstagewithlessthan20%market share. Europe has been the largest driverofESGETFgrowth,withover50%ofthefundsbeingdomiciledinthisregion.Europe’s ESG charge has been driven by policyaswellasinvestorshiftsinattitude.Supranational policy developments have drivendemandandgrowthoftheseproducts, as European regulators place sustainabilityconsiderationsattheheartoflegislative developments7 that encourage fundlaunchesalignedwithESGmandates.Simultaneously,anincreasingnumberofEuropean institutional and private investors aregivinggreaterweighttosustainabilitythemes in their investment strategies. Europeanpublicpension,sovereignwealthandinsurancefundsareincreasinglylookingtosuchstrategies,alignedwithsustainabilitymandates and policy.
Exhibit 3: Global ESG ETFs Asset-Class Breakdown
SubdividingtheuniverseofESGETFsintobroadcategoriesrevealsregionaldifferencesforETFs.European-domiciledESGETFshavepredominantly adopted values and screens aligning investor values and preferenceswithfinancialreturns.NorthAmericanETFsarelargelyintegration-based,meaningfundsincorporateESGcriteriatoenhancelong-termreturnand/ortomanageESGfinancialrisk(Exhibit5).Itshould be noted that index methodologies exist that combine both approachesandfundstrackingthesehavebeengroupedinvaluesandscreensinthisanalysis.Notably,NorthAmericaoffersmorechoicewhenitcomestoimpactapproachesfocusedongeneratingmeasurablesocialorenvironmentalbenefitsaswellasfinancialreturns,andthematicproductsthattargetaspecific,predeterminedinvestmenttheme,suchascleansub-industriesorstructuraleconomictrendsknownas“megatrends.”8NorthAmericaalsooffersmorechoiceinproductsfocusingonthemessuchascleanenergy,whileEuropehadmoreproductsalignedwithpolicies,suchasParis-alignedETFsandclimate-focusedproducts.
Global Landscape
Equity Bond Mixed Assets Alternatives
80.7%
16.8%
2.0%
0.5%
6 Source:Refinitiv/LipperandMSCIESGResearch,LLCasofDec.31,2020
7 EUGreenDeal-AEuropeanGreenDeal|EuropeanCommission(europa.eu)
8 Megatrends-MSCI
Source:Refinitiv/LipperandMSCIESGResearchLLCasofDec.31,2020
Exhibit 4: Distribution of ESG ETFs by Domicile Exhibit 5: Distribution of ESG ETF type by Domicile
Until2015,ESGETFlauncheswererelativelyslowatunder20newfundsperyear.ThemajorityofthefundslaunchedwereinNorthAmerica(primarilyintheU.S.)until2014.EuropestartedtoseeasteadyincreaseinESGETFlaunches,leadingfrom2015onwardfollowingkeyclimatepolicydevelopments,namelytheParisAgreement.EuropeisnowfirstinESGlaunches,followedbyNorthAmerica.Asiaislags,asinvestorsintheregionremainintheearlystagesofESGadoption.TherewasaboomfornewproductsinEuropeandtheNorthAmericain2020withmorethan120ESGETFsbeinglaunched,mostfocusedonequity,butwithbondfundlaunchesgraduallygainingtraction(Exhibit7).
Equity
Bond
Mixed Assets
Alternatives
2003
2004
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0
20
40
60
80
100
120
140
Num
ber
of E
SG
ET
F La
unch
es
North America Europe AsiaOtherAustralia
208
161
2.0%
2
25
14
Integration Values & Screens
ImpactThematic
North America
Europe Asia Australia0
10
20
30
40
50
60
70
80
90
100
%
86
38
35
10
15
9
11
4
10
64
126
18
Per
cent
age
of E
TFs
8 msci.com
Exhibit 6: ESG ETF Launches by Asset Class
SourceRefinitiv/LipperandMSCIESGResearch,LLCasofDec31,2020
SourceRefinitiv/LipperandMSCIESGResearchLLCasofDec31,2020
SourceRefinitiv/LipperandMSCIESGResearchLLCasofDec.31,2020
9 msci.com
Exhibit 7: ESG ETF Launches by Region
North America Asia
Australia Other
Europe
2003
2004
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
0 20 40 60 80 100 120 140
Number of ESG ETF Launches
SourceRefinitiv/LipperandMSCIESGResearchLLCasofDec.31,2020
10 msci.com
Product Success by AUMLookingatthetopESGETFproductsgloballybyAUM,wefindthatatotalof40ETFshaveassetsinexcessofUSD1billion(asofDec31,2020).Themajorityofthese(26)aredomiciledinEurope,however,thegeographicfocusofmostoftheseproducts’investmentsistheU.S.(13).Intermsofthematicconcentration,thecleanenergythemeispopularwithinvestorsinEuropeandNorthAmerica,withfivefundstrackingthethemeglobally,collectivelyholdinginexcessofUSD18billion.
Exhibit 8: ESG ETFs With Assets in Excess of USD 1 Billion
SourceRefinitiv/LipperandMSCIESGResearchLLCasofDec.31,2020
11 msci.com
Morethan4,900ETFsfallwithinMSCIESGResearch’scoverageoutofaglobaltotalofjustover7,000.Inthefollowingsections,weexplorethedistributionofESGattributesacrossthosefundswecover,lookingatthetrendsandtheirdrivers.AlldatapointsanalyzedareasofDec.31,2020.
MSCI ESG Quality Scores and RatingsTheMSCIESGQualityScore(0-10)forfundsiscalculatedusingtheweightedaverageoftheESGscoresofthefund’sholdings.TheQualityScorealsoconsidersthe holdings’ ESG rating trend and the ETF’s exposure to holdings that are ESG leaders and laggards.9 The distributionofFundESGQualityScoresandESGRatingsareexaminedacrosstheuniverseofETFsunderMSCIESGResearch’scoverage(Exhibit9,10).
Key Takeaways: » MostequityETFsgloballyexhibitanESGQualityScorebetween5and6,andafractionofthefunds(lessthan5%)scoreabove8.Bondfundsperformmorefavorably,withmostETFsscoringbetween6and7.Acrossassetclasses,mostproductswereratedaverage(A,BBB,BB),with19.4%ofequityETFsand12.7%ofbondETFsbeingratedasleaders(AAA,AA).
» DividingouruniverseofETFcoveragebyratingsrevealsthatthehighest-ratedequityandbondETFswereEurope-focused.Globally,60%ofAAA-ratedequityETFsand58%ofAAA-ratedbondETFstrackindexeswithaEuropeanfocus(Exhibit11).
» ETFswithafocusontheAsianmarketsoverwhelminglyaccountedforthelaggards(B-,CCC-rated):79%ofthelaggardequityETFsintheMSCIESGResearchuniverseand70%oflaggardbondETFs(Exhibit12).ThisisprimarilybecauseAsiancorporations(largelyoperatinginemergingmarkets)aregenerallyintheearlystagesofimplementingsustainability into their business practices relative to Westernpeers.Inotherwords,inanygivenindustrygroup,Asiancompaniesonaverageperformloweronkey ESG issues versus other regional peers.
Exhibit 9: Fund ESG Quality Score Distribution
Exhibit 10: Fund ESG Rating Distribution
ESG Attributes
Equity ETFs Bond ETFs
0
10
20
30
40
50
60
70
80
90
100
%0≥
1
1≥2
2≥3
3≥4
4≥5
5≥6
6≥7
7≥8
8≥9
9≥10
Per
cent
age
of E
TFs
Fund ESG Quality Score
0Equity ETFs Bond ETFs
10
20
30
40
50
60
70
80
90
100 CCC
B
BB
BBB
A
AA
AAA
%
Per
cent
age
of E
TFs
Fund ESG Ratings
Source:MSCIESGResearch,LLCasofDec.31,2020,covering3820equityand1033bondETFs
Source:MSCIESGResearchLLCasofDec.31,2020,covering3,820equityand1,033bondETFs.
12 msci.com
Exhibit 11: Equity and Bond ETFs Split by ESG Rating and Geographic Focus
» Investorswouldbehard-pressedtofindanESG“leader”fund(AAA,AA)wheretheunderlyinggeographicfocusisnotEuropean,inbothequityandbondETFs(Exhibit11).
» Wefoundthat,globally,mostETFsfocusingontheU.S.andCanadaexhibitanaverage-levelratingacrossequityandbonds.Fromapossible1,349NorthAmerican-focusedequityETFs,76ofthem(5.6%)areleaders(Exhibit12).
» Notably,therewerenoEuropean-focusedETFsratedaslaggardsineitherequityorfixedincome.
Exhibit 12: Fund Geographic Focus by Leaders and Laggards
Other
Global
Asia
South America
North America
Europe
Other
Global
Asia
South America
North America
Europe
0
10
20
30
40
50
60
70
80
90
100
%
0
10
20
30
40
50
60
70
80
90
100
%
AAA4.8%
4.8%
27.6%
0.0%
1.9%
61.0%
4.7%
29.4%
13.3%
0.3%
11.6%
40.7%
3.1%
29.2%
20.8%
0.4%
34.2%
12.3%
1.2%
24.8%
14.0%
2.0%
55.1%
2.9%
0.9%
20.1%
27.7%
5.3%
41.6%
4.3%
2.8%
6.8%
75.1%
0.0%
15.3%
0.0%
0.0%
1.6%
92.1%
1.6%
4.8%
0.0%
AA A BBB BB B CCC
AAA0.00%
24.14%
0.00%
0.00%
17.24%
58.62%
12.62%
23.30%
0.97%
0.00%
20.39%
42.72%
1.25%
17.79%
1.42%
0.00%
58.90%
20.64%
3.29%
35.53%
1.97%
1.97%
40.79%
16.45%
0.00%
42.95%
8.33%
0.64%
44.23%
3.85%
0.00%
26.32%
52.63%
0.00%
21.05%
0.00%
0.00%
0.00%
100.0%
0.00%
0.00%
0.00%
AA A BBB BB B CCC
Per
cent
age
of E
TFs
Per
cent
age
of E
TFs
Source:MSCIESGResearchLLC.AlldataonpageasofDec.31,2020,covering3,820equityand1,033bondETFs
AAA, AA A, BBB, BB B, CCC
# EquityETFs
Geographic Focus
Leader Average Laggard
530 Europe 61.1% 38.9% 0.0%
1349 North America
5.6% 92.1% 2.2%
54 South America
3.7% 94.4% 1.9%
846 Asia 13.5% 63.9% 22.6%
944 Global 20.4% 78.2% 1.4%
97 Other 36.1% 58.8% 5.2%
AAA, AA A, BBB, BB B, CCC
# Bond ETFs
Geographic Focus
Leader Average Laggard
530 Europe 29.3% 70.7% 0.0%
1349 North America
5.3% 93.9% 0.8%
54 South America
0.0% 100.0% 0.0%
846 Asia 2.1% 51.1% 46.8%
944 Global 12.1% 86.0% 1.9%
97 Other 52.0% 48.0% 0.0%
13 msci.com
Delvinginfurther,weexaminedhowETFsperformedglobally across E, S and G. Environmental, Social and Governance(ESG)scoresforfundsmeasuretheunderlyingholdings’managementofandexposuretokeyrisksandopportunities across these spectrums.
Key Takeaways: » Globally,mostequityETFsexhibitedaFundEnvironmentalScoreintherangeof5to6,whilebondETFsrangedbetween6and7.
» Regionalbreakdownsrevealedthatfundswithunderlying European geographic exposure on averageperformhigheronEnvironmentalScorerelativetotherestoftheworld:57%ofETFswithaEuropeanfocusscoreabove6,versus34%ofthosewithNorthAmericanexposureand16%forfundswithAsianexposure.
The E, S and G
Exhibit 13: Average E, S, G Scores of ETFs by Regional Focus
» OnFundSocialScores,over90%ofequityETFsareconcentratedbetweenthescorerangeof4to6.Notably,noequityorbondETFsscoredabovea9onthis metric.
» OnFundGovernanceScores,therewerenoequityETFsthatscoredabovea7.Onageographic-focusbasis,over80%ofETFswithanAsianorSouthAmericanfocusscoredbelow5ongovernance.AlmosttheinverseistrueforEurope-andNorthAmerica-focusedETFs,withover50%oftheseETFsscoringabovea5(Exhibit14).
» Categorizing and aggregating the covered universe ofETFsbasedonregionoffocus—developedandemergingmarkets—indicatesthereisadichotomybetweenthetwomarkettypes,whethereastandwest.ETFs that track European constituents on average scoredhigheracrossthethreetypesofESGScores.ETFswithNorthAmericanfocusrankedsecond,andthose tracking Asian constituents came in last.
Source:MSCIESGResearchLLCasofDec31,2020;numbersofETFsbygeographicfocusareasfollows:DevelopedMarkets,2840,EmergingMarkets,992.
Source:MSCIESGResearchLLCasofDec.31,2020;numbersofETFsbygeographicfocusareasfollows:Europe738,NorthAmerica1,841,SouthAmerica58,Asia893,Global1,201.
DevelopedMarkets Emerging Markets
Environmental Score 5.70 4.86
Social Score 5.11 4.69
Governance Score 5.22 4.81
Europe North America South America Asia
Environmental Score 5.97 5.59 5.56 5.02
Social Score 5.54 4.93 4.70 4.71
Governance Score 5.61 5.10 3.63 3.87
Exhibit 14: ETFs – Distribution of E, S and G Scores
Equity ETFs Bond ETFs
Per
cent
age
of E
TFs
100908070605040302010 0
Fund Goverment Score2≥3 0≥1 1≥2 3≥4 4≥5 5≥6 6≥7 7≥8 8≥9 9≥10
100908070605040302010 0
1≥2 Fund Social Score
0≥1 2≥3 3≥4 4≥5 5≥6 6≥7 7≥8 8≥9 9≥10
100%
908070605040302010 0
Fund Social Score0≥1 1≥2 2≥3 3≥4 4≥5 5≥6 6≥7 7≥8 8≥9 9≥10
Source:MSCIESGResearchLLCasofDec.31,2020,covering3,820equityand1,033bondETFs14 msci.com
Exhibit 15: ETFs – Distribution of E, S and G Score by Fund Geographic FocusP
erce
ntag
e of
ET
Fs
100
90
80
70
60
50
40
30
20
10
0Europe North America South America Asia Global
Fund Grographic Focus - Governance Scores
21.1%
47.3%
23.4%
2.0%
10.6%
37.2%
49.5%
1.2%
3.4%
29.3%
46.6%
20.7%
1.7%5.2%
38.5%
41.0%
11.3%
37.6%
42.9%
13.7%
4.7%
100
90
80
70
60
50
40
30
20
10
0
Fund Grographic Focus - Social ScoresEurope North America South America Asia Global
6.0%
48.0%
31.7%
73.8%
11.2%3.3%
3.7%
79.3%
19.0%
26.2%
3.8%
49.4%
18.0%
54.5%
39.5%
2.3%
1≥2
0≥1
2≥3
3≥4
4≥5
5≥6
6≥7
7≥8
8≥9
9≥10
100
90
80
70
60
50
40
30
20
10
0
%
Fund Grographic Focus - Environmental ScoresEurope North America South America Asia Global
7.7%
48.9%
23.3%
18.4%
2.6%
30.5%
42.2%
18.1%
69.0%
6.9%1.7%
19.0%
1.7%
26.0%
16.9%
37.4%
0.9%15.1%
43.8%
19.3%
1.4%
29.5%
3.7%
4.8%
15 msci.comSource:MSCIESGResearchLLCasofDec.31,2020;numbersofETFsbygeographicfocusareasfollows:Europe738,NorthAmerica1,841,SouthAmerica58,Asia893,Global1,201
16 msci.com
The MSCI Fund Weighted Average Carbon Intensity (WACI)measuresafund'sexposuretocarbon-intensivecompanies.ThisfigurerepresentstheestimatedgreenhousegasemissionsperUSD1millioninsalesacrossthefund’sholdings(unitsoftonsCO2equivalent/USDMillionSales).Thisallowsforcarbonemissionscomparisonsbetweenfundsofdifferentsizes.
Thecarbonintensityofacompanyishighlydependenton the industry it operates in. Industry exposures naturallyvarybetweencountriesandregions,sotoadjustforthis,theuniverseofequityandbondETFswasgeographicallysubdividedbasedonthecountry/regionfocusofthefundindexesormandate.TheaverageWACIofETFsbasedontheirunderlyingcountry/regionoffocusistabulatedandrankedfromleast-carbon-intensive(green)tomost-carbon-intensive(red)(Exhibit17).ForbondETFs,itshouldbenotedthatcarbon intensity is only applicable to corporate bonds, notsovereignbonds;however,75%ofglobalbondETFswithinourcoveragearecorporatebondfunds.
Key Takeaways: » Globally,mostETFs(58%)exhibitedamoderateWeightedAverageCarbonIntensity(WACI)between70-250tonsCO2equivalent/USD$MillionSales.
» Giventhatafund’sWACIcanvaryoverawiderange,fromlessthan10toabove4,000,regionalandindustrydifferencesmatter.Thelowest-carbon-intensityETFs(WACI<20)exhibitedaclearFinancialsfocus,encompassingfundstrackingBankingandInsuranceindustries,whichnaturallyhavemuchlessCO2outputrelativetoManufacturingandfactory-ledpeers.Utilities,Miningandotherextractive-industry-focusedETFsexhibitthehighestcarbonintensities.ETFswithanemergingmarketfocusonaverageexhibitahighercarbonintensity,almosttwice(x1.65)thatofdevelopedmarketETFs(313.9versus189.4tonsCO2equivalent/USDMillionSales).
Carbon Exposure
Exhibit 16: ETFs – Distribution of Fund Weighted Average Carbon Intensity, Tons CO2 Equivalent/USD $ Million Sales
» WithindevelopedmarketsETFs,fundswithafocusoncompaniesoperatinginNordiccountriesleadwiththelowestcarbonintensities.Thesizeoftheunderlyingmarketbeingtrackedcanhaveasignificantimpact:Fundstrackingcountryindexeswithveryfewholdings(e.g.MSCIGreece,Ireland,Kuwait,UAEwithfewerthan10holdings)canexhibitveryhighorlowintensities,essentiallyduetolackofindustrydiversification.
Source:MSCIESGResearchLLCasofDec.31,2020,covering3,820equityand1,033bondETFs
Low 15 to <70
Very Low 0 to <15
Very High 525to <2000
High 250 to <525
Moderate 70 to <250
50.07%
18.43
%5.68%
18.3
9%
7.44%
Exhibit 17: ETFs – Average ETF WACI by Underlying Geographic Focus, Tons CO2 Equivalent/USD$ Million Sales
Source:MSCIESGResearchLLCasofDec.31,2020,covering3,820equityand1,033bond ETFs
17 msci.com
TheFundBoardFlagmetricshowsthepercentageofafundportfolio’sunderlying market value exposed to companiesranking"belowaverage"relative to global peers based on our assessmentofboardstructureanditseffectiveness.
Mapping the Board Flag metric acrosstheuniverseofcoveredETFsshowsthatfundstrackingEuropeanconstituentsoutperformpeersonexposuretofirmswitheffectivelyrunboards based on MSCI’s assessment asofDec.31,2020.ThecompaniesheldinthesefundsalsoexhibitthesmallestBoardFlagrange,withmostfundsclusteredina0-10%range.Conversely,fundsfocusedmostly on companies operating in AsiaarecrowdedatthehigherBoardFlagrange,atbetween25-45%.ETFswithanAsianfocusalsodisplaythelargestrangeinthisregard,withahandfulofETFsexhibiting100%Fund Board Flag %.
Board Governance and Female Participation
Exhibit 18: ETFs Board Flag % distribution
Source:MSCIESGResearchLLCasofDec.31,2020,covering3,820equityand1,033bondETFs ThetealandyellowbarsrepresentthequartilesofFundBoardFlag%distributions,themidpointbetweenthembeingthemedianfigureforfundsofeachgeographicfocus.TheerrorbarsatthetopandbottomrepresenttheminimumandmaximumFundBoardFlag%forfundsofeachgeographicfocus.
North America
SouthAmerica
Europe Asia0
10
20
30
40
50
60
70
80
90
100
Fund
Boa
rd F
lag
%
Fund Geographic Focus
18 msci.com
19 msci.com
The Fund Females Representing 30%ofDirectorsmetricisthepercentageofafund’sunderlyingmarket value exposed to companies wherewomencompriseatleast30%oftheboardofdirectors(Exhibit19,darkergreenshowsmostunderlyingfirmsexhibitingfemaleboardparticipation).ETFstrackingEuropean securities exhibit the mostexposuretofirmswithfemaleparticipationofatleast30%attheboard level.
Exhibit 19: Percentage of ETFs With Females Representing 30% of Directors (%)
60
50
40
30
20
10
0
%
Per
cent
age
of E
TFs
Europe North America South America Asia12.20%4.34%1.22%2.17%1.63%5.83%6.23%
12.47%22.09%24.53%7.32%
6.36%2.55%4.73%
11.68%15.21%18.41%28.52%7.66%3.75%1.03%0.11%
32.76%51.72%1.72%0.00%0.00%1.72%1.72%3.45%5.17%1.72%0.00%
29.23%52.30%9.29%2.46%0.78%1.46%2.24%1.12%0.90%0.22%0.00%
Fund Geographic Focus
0≥10
0
10≥20
20≥30
30≥40
40≥50
50≥60
60≥70
70≥80
0≥100
10≥2020≥3030≥4040≥50 50≥6060≥70 70≥8080≥9090≥100
Source:MSCIESGResearchLLCasofDec.31,2020,covering3,820equityand1,033bondETFs They-axisdenotesthe“%offunds,”thex-axisdenotesthe“fundgeographicfocus,”andthegroupingcolorsaredecilesof%offundportfoliowithfemaleboardparticipationofatleast30%.Darkershadesindicatehigherfemaleboardparticipation.
Equity ETFs Bond ETFs
0
10
20
30
40
60
%
50
0
10
20
30
40
50
60
70
80
90
0
0≥1
1≥5
5≥10
10≥2
0
20≥3
0
30≥4
0
0
0≥1
1≥5
5≥10
10≥2
0
20≥3
0
40≥5
0
30≥4
0
Per
cent
age
of E
TFs
Per
cent
age
of E
TFs
Fund UN Global Compact Violation %
Fund Controversial Weapons Involvement %
WealsoassessedtheexposureofourETFcoverageuniversetoviolationsofglobalnorms.
The Fund Global Compact Compliance Violation metricshowsthepercentageofafund’smarketvalueexposed to companies that violate the UN Global Compact(UNGC)principles:humanrights,laborstandards,theenvironmentandanti-corruption.Wealsolookatthepercentofafundportfolio’smarketvalueexposedtocontroversialweapons,throughcompanieswithtiestoclustermunitions,landmines,biological/chemicalweapons,depleteduraniumweapons,blindinglaserweapons,incendiaryweapons,and/ornon-detectablefragments.
Key Takeaways: » ThemajorityofglobalETFsdonothaveexposure
to any holdings that violate the UN Global Compact principles;over50%ofbothequityandbondETFsarefullycompliant.
» AsmallfractionofETFs(0.58%,26funds)areinconsiderableviolationofUNGCprinciples,withmorethan20%ofunderlyingcompanieshavingviolatedtheGlobalCompact.ETFswithhighexposuretoextractiveindustries—metalsmining,naturalresources,oilandgas—aretheonespredominantly exposed to UNGC violations. ETFs that track companies operating largely in South American countries are also considerably exposed to the extractive industry, making them vulnerable topossibleviolationsoftheUNGC.
» MostETFsdonotexhibitcontroversialweaponsinvolvement(Exhibit20).Globally,99%ofETFsrangebetween0%to5%inunderlyingcontroversialweaponsexposure.ThehandfulofETFsthatexhibithigherinvolvementexplicitlytrackweapons,defenseandwarfareindustry-relatedindexes.
Global NormsExhibit 20: ETF Global Norms Violations
Source:MSCIESGResearchLLCasofDec.31,2020,covering3,820equityand1,033bondETFs20 msci.com
BACK
21 msci.com
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