Now the rapid growth in ESG incorporation by investors and the representatives of all varieties has been accompanied by growth of the number of and variety of ESG indexes and benchmarks. Some ESG indexes are designed to allow performance comparisons between the index and a vanilla counterpart. For example the S&P 500 index and the S&P 500 Ex Fossil Fuels index. Other ESG bench marking indexes are meant to express a systematic ESG investment theme, or a set of themes. For example the Morgan Stanley Capital International or MSCI Global Climate index. Many indexes exist for both equity and fixed income and now other investments. But there still seems to be room for growth with possible new entrants covering additional asset classes, expressing new themes and being very pointed in the ESG sub-issues that they attend to. Let's take a look at a number of the most popular index series MSCI, Dow Jones, Calvert, FTSE. Of course, we could also include Standard and Poor's and numerous others. It is not with malice that we focus on any group, we're giving a sense of the breadth of indexes. There are hundreds of thousands, if not millions of indexes available around and across the world for measuring and benchmarking different kinds of investments, classes and so on. Here, we're taking a look at some with the historical perspective that is appropriate. One of the most longstanding indexes, which is now owned by MSCI, is the Domini complex. Amy Domini is a pioneer of social impact investing, along with her partners, Peter Kinder and Steve Lydenberg who in 1990 created the Domini 400 Social Index. It's now known as the MSCI KLD 400 Social Index. It essentially considers and incorporates 400 primarily large-cap US corporations. In a sense designed to be like the Standard and Poor's 500 except including SRI screens. Of course, if you start with 500, and negatively screen out firms that are somehow anathema based on here historically private ratings then the number goes down. Amy Domini's firm Domini Social Investments doesn't own the index they offered tracking products until 2006 and they are now actively managed. MSCI's acquisition of the KLD 400 Index through the 2010 purchase of RiskMetrics, spurred the creation of a large even into the hundreds of elements, family of SRI or ESG indexes for equity and fixed income categories. Complex that you see in the graphic from msci.com here describes the two general asset class categories starting with equity, here broadly represented by the all country World Index covering most publicly traded stocks on earth and then fixed income broadly measured by the Barclays Global Aggregate Bond Index definitions. Starting with an unadulterated set of firms in [inaudible] included in the ACWI and Global Agg as they're referred to, then passing through a filter of ESG ratings and information, giving rise to a plethora of indexes that might be benchmarking products interesting to many. MSCI sustainability, the SRI or socially responsible indexes or the MSCI without or ex controversial weapons and so on. On the bond side again mirroring the stock side of sustainability component the SRI and then ESG weighted or green bonds which are focusing are or more heavily weighting the target exposure. Specifically for example, targeting green bonds in the world of fixed income investments. Now the MSC global sustainability indexes are a subset that target the highest ESG rated companies making up about half the market cap in each sector of the underlying index. So again now focusing on market cap but screening out about half based on ESG criteria. An example is the MSCI World ESG index which includes large and mid-cap securities focusing on developed countries with the parent index being the MSCI World essentially the ACWI but not including emerging markets. It includes companies with high ESG rankings relative to sector peers again dis-aggregated by underlying sub-sectors. They target sector distributions reflecting those of the parent indexes. The ACWI ESG index starts with the All Country World Index and adds stocks in some emerging markets continuing to the MSCI World universe then applying ESG screens. Again, focusing on global sectors is also popular emerging markets, the USA Investable Market Index and so on. It's not without controversy. For example, at one point in history, the MSCI emerging market ESG index which is focused on 23 emerging market countries around the world and specifically on large and mid-cap securities in those markets, has a fairly large waiting to China, in part because now that China is listing A-Shares. It's a large part of the global market cap of emerging markets, so classified. In this index at one point, it was more than 20 percent of the ESG index, which again in part because China's contribution to global pollution is undeniably large, may find some wondering exactly how particular definitions are relevant. As usual, beauty is in the eye of the beholder. There are important lessons that can be gained when looking at long-run multi-market cycle historical records for indexes and in this case for the MSCI KLD 400 Social Index. Again remember the MSCI KLD 400 Social Index, which used to be called the Domini 400, is a market-cap-weighted index of stocks from the MSCI USA IMI or investable market index with the highest MSCI ESG ratings. What you can see here when you consider the MSCI KLD 400 versus the broader USA investable market index, history is that they're fairly closely tracking one another. There are certainly times when the 400 outperforms and sometimes when it underperforms the index. But historically they track one another fairly closely. Now of course, those deviations can look like performance above or beyond the index that is broader. But the point is simply this, it's not necessarily ex-ante the case that we see strong outperformance or strong underperformance, despite what many advocates or critics tend to say. The long-term historical record is perhaps that we don't see overall index level harm by screening out some, at least according to the KLD 400 paradigm, but we also don't see tremendous outperformance. Now the methodology historically that lies beneath the assessments, which deserves its own attention, in part because it's so large and president of the industry is called IVA. Again historically, intangible value assessment. IVA is MCSIs methodology for generating company scores on various ESG measures to qualify or disqualify a company, or a bond, or an investment, for index inclusion. Although it's used to build the index it's also been a separate product. It can be used by companies for example to grade themselves, or it can be used strategically to guide a company's policy developments or to forecast operational and market effects of subscribing to larger agendas like the United Nation's Principles of Responsible Investment or even use by third-party entities like NGOs or non-governmental organizations or groups like activist's groups for agenda setting. Although it was meant to be a global standard for ESG measurement, it's partially subjective, like in fact most measures of impact that involve ratings and some measure of what we call soft assessments, as well as scientific measurements, which are often blended together. Until 2009 again this historical view has been called KLD Stats.
