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MSCIUSAESGSelectIndexMethodologyJuly2010MSCIUSAESGSelectIndex|July2010MSCIResearch2010MSCI.
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RV07101.
INTRODUCTIONTheMSCIUSAESGSelectIndexisdesignedtomaximizeexposuretopositiveenvironmental,socialandgovernance(ESG)factorswhileexhibitingriskandreturncharacteristicssimilartothoseoftheMSCIUSAIndex.
TheIndexissector-diversifiedwithhighESGratingsfromeachsector.
RelativetotheMSCIUSAIndex,theMSCIUSAESGSelectIndextendstoover-weightcompanieswithhigherESGratingsandunder-weightcompanieswithlowerratings.
TobaccocompaniesarenoteligiblefortheIndex.
2.
ESGRESEARCHFRAMEWORKMSCI'sESGresearchframeworkgeneratesananalysisandratingofeachcompany'smanagementofitsenvironmental,socialandgovernanceperformance.
Theratingcriteriaaddressacompany'sESGperformanceinthecontextoffivecategories,coveringkeycorporatestakeholders.
Environment–rateacompany'smanagementofitsenvironmentalchallenges,includingitsefforttoreduceoroffsettheimpactsofitsproductsandoperations.
CommunityandSociety–measurehowwellacompanymanagesitsimpactonthecommunitieswhereitoperates,includingitstreatmentoflocalpopulation,itshandlingofhumanrightsissuesanditscommitmenttophilanthropicactivities.
EmployeesandSupplyChain–assessacompany'srecordofmanagingemployees,contractorsandsuppliers.
Issuesofparticularinterestincludelabor-managementrelations,anti-discriminationpoliciesandpractices,employeesafety,andthelaborrightsofworkersthroughoutthecompany'ssupplychain.
Customers–measurethequalityandsafetyrecordofacompany'sproducts,itsmarketingpractices,andanyinvolvementinregulatoryoranti-competitivecontroversies.
GovernanceandEthics–addressacompany'sinvestorrelationsandmanagementpractices,includingcompanysustainabilityreporting,boardaccountabilityandbusinessethicspoliciesandpractices.
MSCIappliesitsproprietaryESGratingframeworktoeachcompanybyselectingtheESGratingcriteriamostrelevanttoeachfirm.
Toevaluateacompany,analystsreviewmorethan500datapointsandscoremorethan100indicators.
MSCIexpressesacompany'sESGperformanceasanumericalscoreandonaletter-basedratingscale.
Theratingsfallonanine-pointscalefromAAAtoC.
Scoresandratingsarenotnormalizedacrossindividualindustriesortheoverallcompanyuniverse.
Thismeansthatoneindustrymayhavenocompaniesthatreceiveany"A"ratings,whileanotherindustrymayhavenocompanieswith"C"ratings.
FormoredetailsonESGscoresandratings,pleaserefertohttp://www.
kld.
com/research/3.
CONSTRUCTINGTHEMSCIUSAESGSELECTINDEXConstructingtheMSCIUSAESGSelectIndexinvolvesthefollowingsteps:Definingtheunderlyinguniverse;Definingtheoptimizationconstraints;andMSCIUSAESGSelectIndex|July2010MSCIResearch2010MSCI.
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RV0710Determiningtheoptimizedportfolio.
3.
1DefiningtheunderlyinguniverseTheunderlyinguniversefortheMSCIUSAESGSelectIndexistheMSCIUSAIndex,excludinganystockswithTobaccoinvolvement.
3.
2DefiningtheoptimizationconstraintsConstituentsareselectedtomaximizeexposuretocompanybasedESGscores,subjecttomaintainingriskandreturncharacteristicssimilartotheMSCIUSAIndex.
ESGscoresarenormalizedandfactoredintotheoptimizationprocess.
OptimizationisaquantitativeprocessthatconsidersthemarketcapitalizationweightsfromtheMSCIUSAIndex,ESGscoresandadditionaloptimizationconstraintstoselectandweightheconstituentsintheIndex.
NormalizationoftheESGscoresallowstheoptimizationtoassesseachscoreinthecontextoftheoveralldistributionoftheESGscores.
Ateachquarterlyindexreview,thefollowingoptimizationconstraintsareusedforreplicabilityandinvestability:Thepredictedtrackingerrorisrestrictedto1.
8%Themaximumweightofanindexconstituentwillbe5%;Theminimumweightofanindexconstituentwillbe0.
1%;Thenumberofindexconstituentsisconstrainedtoamaximumof350;ThesectorweightsoftheMSCIUSAESGSelectIndexwillnotdeviatemorethan+/-3%fromthesectorweightsofMSCIUSA;TheonewayturnoveroftheMSCIUSAESGSelectIndexisconstrainedtoamaximumof15%atSemi-AnnualIndexReviewsand10%atQuarterlyIndexReviews;Onewaytransactioncostissetto0.
5%whichaimstoachieveabalancebetweenturnoverandESGScores;andAnAS/CF(AssetSelection/CommonFactor)RiskAversionRatioof10isapplied.
PleaserefertotheAppendixforthedescriptionofthehandlingofinfeasibleoptimizations.
3.
3DefiningtheoptimizedportfolioTheMSCIUSAESGSelectIndexisconstructedusingthemostrecentreleaseoftheBarraOpenOptimizerincombinationwiththerelevantBarraEquityModel.
TheoptimizationusestheMSCIUSAIndexastheuniverseofeligiblesecuritiesandthespecifiedoptimizationobjectiveandconstraintstodeterminetheoptimalMSCIUSAESGSelectIndex.
MSCIUSAESGSelectIndex|July2010MSCIResearch2010MSCI.
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MAINTAININGTHEMSCIUSAESGSELECTINDEX4.
1QuarterlyIndexReviewsTheMSCIUSAESGSelectIndexisrebalancedonaquarterlybasistocoincidewiththeregularIndexReviews(Semi-AnnualIndexReviewsinMayandNovemberandQuarterlyIndexReviewsinFebruaryandAugust)oftheMSCIGlobalInvestableMarketIndices.
ThechangesareimplementedattheendofFebruary,May,AugustandNovember.
ESGscoresusedforthequarterlyindexreviewswillbetakenasoftheendofthemonthprecedingtheIndexReview,i.
e.
,January,April,JulyandOctober.
AteachIndexReview,theoptimizationprocessoutlinedinSection3isimplemented.
CompaniescanonlybeaddedtotheMSCIUSAESGSelectIndexatregularIndexReviews.
4.
2OngoingEvent-RelatedMaintenanceIngeneral,theMSCIUSAESGSelectIndexfollowstheeventmaintenanceoftheunderlyingMSCIUSAIndex.
NewadditionstotheunderlyingindexduetocorporateeventsarenotaddedsimultaneouslytotheMSCIUSAESGSelectIndex,butareconsideredforinclusionatthefollowingIndexReview.
CompaniesdeletedfromtheMSCIUSAIndexbetweenIndexReviewsduetocorporateeventsmaintenancearealsodeletedatthesametimefromtheMSCIUSAESGSelectIndex.
ThetechnicaldetailsrelatingtothehandlingofspecificcorporateeventtypescanbefoundintheMSCICorporateEventsMethodologybookavailableat:http://www.
mscibarra.
com/products/indices/international_equity_indices/gimi/stdindex/methodology.
htmlMSCIUSAESGSelectIndex|July2010MSCIResearch2010MSCI.
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RV0710Appendix:HandlingInfeasibleOptimizationsDuringthequarterlyindexreview,intheeventthatthereisnooptimalsolutionthatsatisfiesalltheoptimizationconstraintsdefinedinSection3.
2,thetrackingerrorwillberelaxedinstepsof0.
2%untilanoptimalsolutionisfound.
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