Today one of the largest providers, MSCI has a product called MSCI ESG ratings, which is essentially a roll up of several Legacy ESG rating providers, including, the aforementioned KLD, but also innovest, IRRC, GMI and others. MSI recently has reported having more than 200 analysts evaluating data from voluntary company disclosures, big data analytics reports from 3rd parties, including government sources covering thousands and thousands of companies reporting more than 7,500 companies. And literally hundreds of thousands of underlying equity and fixed income investments. These ratings are used by thousands of investors worldwide and form the basis of more than 1000 equity and fixed income index is there are many components and sub components. But also can be summarized in ratings ranging as if it's being expressed a credit rating from triple A to triple C, best to worst. But then also have the disaggregated of numerical scores in a paradigm that becomes increasingly disaggregated as you get more refined. There are three broad components, if you will inherent in the methodology. First is the idea of identifying key ESG elements from two perspectives 1 isolating risks and then Michigan's or risk exposure and risk management. Those are identified for high level industry categorizations and conceptual categorizations. And then individual investments are valued with respect to the exposure in the management of the ESG category risk. And finally, there is a peer comparison methodology which allows for all kinds of industries to be rated. It avoids, if you will the requirement which some might believe in but which is still important for the views of others that certain kinds of firms, including those that are especially associated, for example with production of carbon oil companies, for example can get raided. Now, the data inputs are remarkable. And MSCI, other providers use hundreds of potential different data sets. They report using thousands of data points across company reporting data on thousands of firm directors. Many thousands of shareholder meeting results, at least 80 different business and geographic segment metrics somewhat akin to gap generally accepted accounting principle industry and segment data and then many hundreds. If you will metrics on Michigan's so many inputs on exposures. Many inputs on management. And again, the sources are replete governmental sources, comforting sources, traditional sources annual reports and proxy statements, but also media reports, news announcements leadership quotes. Now there are 37 different key issue areas tracked by MSCI those are industry relevant. And there are waited on what's called a materiality or a mapping framework some listeners might be already familiar with, such as bees, materiality, mapping. This is MSCI's version, if you will, of the notion of materiality because after all, not all data points. Not all issues are material either for all investors or for the underlying targeted exposure. Those are tight traded, ultimately into ESG ratings, remember rating arranging from triple A to triple C involving the weightings that we mentioned a second ago? The rating scores and weights exist for hundreds of thousands of potential securities and investments. And it evolves an ongoing revision process from an examination process from year to year to get a sense of what might be going into the 37 different issue areas you can see indicators for both exposures. Risk exposures and risk Michigan's or management's across the three ESG components. Environmental, social and governance moving from the bottom up. You can see raw data is analyzed in the manner already described and then is incorporated in exposure scores for the sub components of the environment, across business segments, geographic segments and so on for those risks. The Michigan's are also the ways companies manage, the risks are present. And, of course, in the environmental sense, as an example, that's important because we might have a company that somehow causes a polluting chemical to be released from a production process. But also mitigates it with carbon credits or with repatriating the externality in some other way. So it might have a high exposure, but a high Michigan resulting in neutrality, which is a concept we've discussed that is boiled down to a zero through 10 score available for the environmental key issue area. Same thing holds true for the social and the governance key issues for ESG areas, those three areas, then get passed through awaiting matrix describing each pillar and environmental pillar, a social pillar and a governance pillar. Those are then weighted at the three pillars score level to a weighted average key issue score. So normalizing once again to a zero through 10 range. That weighted average firm level value is then compared and adjusted relative to industry peers. And for extreme outliers, there's a truncation or winds or Ization process, giving a final industry adjusted zero through 10 score, and that gets mapped into the triple A triple C letter rating provided by MSCI. Now, how does MSCI select their key issues and set the weights well again? Those key issues from the list of 37 on the previous slide are assigned to a company according to the industry it's in. So that's possibly varying due to a distinctive company or industry business model. Each key issue is assigned a high, medium or low impact in a short or long term timeframe. So think of it as a two by three or three by two. This results in a waiting for any given issue, typically corresponding 5-30% of the total waiting again horizontally short versus long term short term, less than two years long term, five years or plus. And then industry by itself, getting awaiting of major or minor by its individual contributions. Now, what do those 37 key issues look like? Well, here you can see the three ESG pillars. You can see 10 second level themes and then finally, the 37 key issue areas. For example, for the environmental pillars, you see climate change, exposure, natural resources, pollution and waste, and environmental opportunity, which sounds an inversion of the risk. Corresponding, of course, perhaps to those indexes or are those investors who are seeking a focus as opposed to seeking a negative screening? And then within each of those key issues, you see a number of components. For example, within the environmental pillar, the climate change theme. We see carbon emissions as one of the key issues product carbon footprint related to product production, climate change vulnerability and the financing of environmental impact. Blue Ping in not just the production of the externality but its financing an interesting example is in the pollution and waste thematic category where we see toxic emissions. And waste packaging material waste, which could be longstanding components of the environmental pillar instead of risk. But we also now see electronic waste. And that, of course, has been dynamic in as far as electronics have not been around forever. And they certainly now produce all kinds of potential waste that is antagonistic to the environment the batteries and electric electric vehicles, for example, or the medals and cell phones. Also again, we see positive environmental opportunities. So investments in clean tech or renewable energy solar wind also efforts in green building. In the construction industry, which is often labeled with a negative ESG risk exposure. But here now focusing on the delta, if you will, or moving toward positive impact. So the first theme under the social pillar is human capital relating to management of labor supply chain labor standards including exposure the use of sweatshops, health and safety in the workplace. And also the positive investment in human capital development. Product liability relates to the safety and quality of products chemical safety, but also financial product safety, which is a controversial area responsible investment by the firm. And health and demographic risk again, from a product perspective focusing on the broader notion of social good again. Another new key issue area is privacy and data security, which has been a very large issue. Societally in recent years, including through some major players, including the Facebook and Google and others, which many see providing a very positive kind of product but which others take the task based on privacy and data security concerns. Stakeholder opposition is a pretty interesting concept. There have been a number of conversations that have happened at the national international level in the last decade on stakeholders. The idea of stakeholders as opposed to just shareholder value optimization is basically finance 101. Historically, the idea is that capital structure and company activities should be set up to maximize shareholder value. But more recently, but maybe not as recently as people think the idea that other stakeholders might be relevant, including the common good, including the economy, including the environment is important to people. So how we think about stakeholders and opposition to the presence of stakeholders is an important component of the social element, according to some. Finally, social opportunities in the social category. Access to healthcare, access to communication information, access to financing markets and not being distanced from banking or being unbanked. And opportunities, nutrition and health round out the social category, governance again. The the older, more traditional notion of governance. Corporate governance related to whether there are staggered boards, whether there are poison pills in place, whether special meetings could be called historically, whether there are there's an independent audit committee. Whether the pay of CEOs matches performance but also again, there might be an overlap with social with pay being a social issue, for example, inherent in the Ratio of CEO pay to rank. And file pay, which in the us some described as being 301, corporate behavior, how businesses are run and how business conduct themselves. Anti competitive practices, anti corruption, business ethics and so on are part of the system. Now, you can easily see once again that these ESG key issue areas first are not necessarily distinct from one another, especially since governance often has to do with reporting transparency and accountability when E and S are part of the transparency, accountability and so on. In addition, there's a dynamic nature of these over time, the 37 areas certainly will continue to evolve. And, of course, it almost goes without saying that different investors simply care about different things. Of course, it's easy to say that investors all care about product safety and quality and good management of businesses. But there may be tradeoffs, tradeoffs among each of these against one another and or trade off against risk adjusted returns. Although many argue that good management and an ethical management of companies, it leads to good outcomes from a returns perspective and a financial performance perspective, there are others that would recognize that, in fact, there are potential antagonisms. This matrix or these lists describe the ability to be able to assess those and conform to what investors may want
