Cover

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Fund ESG TransparencyQuarterly Report 2021Q1 Spotlight: ETFs

Rumi MahmoodMSCI ESG Research LLC

Inside Left

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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

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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

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» 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

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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

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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

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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

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Exhibit 6: ESG ETF Launches by Asset Class

SourceRefinitiv/LipperandMSCIESGResearch,LLCasofDec31,2020

SourceRefinitiv/LipperandMSCIESGResearchLLCasofDec31,2020

SourceRefinitiv/LipperandMSCIESGResearchLLCasofDec.31,2020

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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

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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

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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.

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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%

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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

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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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