Understanding MSCIs Climate Metrics

RESEARCH INSIGHTS
MSCI ESG RESEARCH LLC
© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document.
RESEARCH INSIGHTS
Manish Shakdwipee
Executive Director, MSCI Research
Guido Giese
Managing Director, MSCI Research
Zoltán Nagy
Executive Director, MSCI Research
© 2023 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. PAGE 2 OF 50
RESEARCH INSIGHTS
Contents
Executive summary ..................................................................................................... 4

Introduction ................................................................................................................. 5
Climate metrics selection: key criteria ......................................................................... 6
Purpose of climate metrics ................................................................................................ 6
Climate impact vs. climate risk metrics ........................................................................ 7
Current vs. forward-looking metrics ............................................................................... 9
Potential applicability for different use cases................................................................. 10
Investor’s climate strategy ............................................................................................ 11
General acceptability of the metric .............................................................................. 11
Availability of historical data......................................................................................... 11
Stability of the metric .................................................................................................... 13
Climate metrics summary .......................................................................................... 14
In-depth overview of MSCI ESG Research’s climate metrics ...................................... 15
Carbon Emissions EVIC Intensity and Financed Emissions .......................................... 16
Potential Carbon Emissions ............................................................................................. 20
Implied Temperature Rise ................................................................................................. 24
Carbon Emissions Revenue Intensity............................................................................... 30
Fossil Fuel Revenue ........................................................................................................... 34
Cleantech Revenue ............................................................................................................ 37
Low Carbon Transition Score and Categories ................................................................ 40
Climate Value-at-Risk ........................................................................................................ 44
Appendix: .................................................................................................................. 48
RESEARCH INSIGHTS
Executive summary
Current industry debates around climate investing have raised the urgency of understanding,
measuring, monitoring and mitigating not only financial risks arising from climate change, but also
the impact of investments on climate change.
Policy makers and industry bodies have taken a deep interest in climate investing and have
proposed several climate metrics to support asset owners, asset managers and other market
participants in measuring and monitoring their portfolio’s climate-change exposure and
performance. There are challenges though:
• Climate metrics may differ substantially in terms of their scope and objectives.
• There are factors such as metrics volatility or the availability of historical data which can limit
their suitability for certain climate investing use cases.
• Investors may have widely different and/or multiple climate objectives which means that a single
solution or a single metric may not serve all.
It is therefore critical for market participants to understand the climate metrics which can help them
in meeting their strategy-specific goals and requirements such as low carbon, ex-fossil fuels, net-
zero or alignment with 2°C or 1.5°C global-warming targets.
A portfolio’s climate strategy determines which metrics are more aligned compared to others to
meet the underlying requirements. The metrics needed may also change at different stages of the
climate-investment process. In this paper we provide a toolkit to support market participants in
identifying such metrics by outlining the key criteria that they need to consider:
• Purpose of climate metrics
− Climate impact vs. climate risk metrics
− Current vs. forward-looking metrics
• Potential applicability for different use cases
− Investor’s climate strategy
− General acceptance of the metric
− Availability of historical data
− Stability of the metric
In addition, the paper outlines the status of MSCI ESG Research’s climate metrics in terms of their
objectives, key strengths and limitations and possible use cases.
RESEARCH INSIGHTS
Introduction
Limiting the rise in average global temperatures to 1.5°C above pre-industrial levels by 2100 requires
the amount of carbon emissions released into the atmosphere to be net-zero by 2050.1 Policy
makers and industry bodies have therefore taken a deep interest in the evolution of climate change
and net-zero investing.
The first major foray into this space was by the United Nations-convened Net-Zero Asset Owner
Alliance (NZAOA) which committed to transitioning its members’ investment portfolios to net-zero
greenhouse-gas (GHG) emissions by 2050.2 The alliance published its inaugural 2025 target-setting
protocol in January 2021, with an enhanced second edition in January 2022.3 In March 2021, the
Paris Aligned Investment Initiative (PAII) of the Institutional Investors Group on Climate Change
(IIGCC) came up with an implementation guide for its net-zero investment framework.4 Similarly, the
Glasgow Financial Alliance for Net Zero (GFANZ), a global coalition of financial institutions
committed to accelerating the decarbonization of the economy, came up with its recommendations
and guidance related to net-zero transition plans in June 2022.5
These initiatives and many others have proposed several climate metrics to measure and monitor
climate risk in investment portfolios. However, in the absence of clarity around their objectives and
use cases, the range of different climate metrics available may make the task of selecting the most
suitable metric(s) to meet climate investment objectives quite challenging.
To support institutional investors as they seek to identify suitable metrics to meet the requirements
of the different stages in their climate-investment process (Exhibit 1),6 this paper provides a toolkit
which explains the key criteria investors could use. It also outlines the status of MSCI ESG
Research’s climate metrics in terms of their climate objectives, key strengths and limitations and
possible use cases.
1 “Climate Change 2022: Mitigation of Climate Change — Summary for Policymakers.” Intergovernmental Panel on Climate Change
(IPCC), 2022.
2 UN-convened Net-Zero Asset Owner Alliance, United Nations Environment Programme — Finance Initiative.
3 “Inaugural 2025 Target Setting Protocol,” NZAOA, January 2021; “Target Setting Protocol Second Edition,” NZAOA, January 2022.
4 “Net Zero Investment Framework (1.5°C): Implementation Guide.” PAII, March 2021.
5 “Financial Institution Net Zero Transition Plans: Recommendations and Guidance.” GFANZ, June 2022.
6 “Implementing Net-Zero: A Guide for Asset Owners.” MSCI ESG Research, July 2022.
RESEARCH INSIGHTS
Exhibit 1: Different steps in the climate investment process
Source: MSCI ESG Research
Climate metrics selection: key criteria

This section outlines key criteria investors could consider for selecting climate metrics for their
climate-investment process. These criteria, as listed below, are related to the purpose of different
climate metrics and potential applicability for different use cases:
• Purpose of climate metrics
− Climate impact vs. climate risk metrics
− Current vs. forward-looking metrics
• Potential applicability for different use cases
− Investor’s climate strategy
− General acceptance of the metric
− Availability of historical data
− Stability of the metric
Purpose of climate metrics

Investors may be interested in understanding either the potential impact of climate change on their
portfolios or, conversely, the potential impact of their portfolios on the climate (i.e., global warming),
or both. In addition, they may be interested in knowing the current level or projected future levels of
such impact. It is therefore important for them to understand which metrics are suitable for which
purpose.
RESEARCH INSIGHTS
Climate impact vs. climate risk metrics

Exhibit 2 classifies the different MSCI ESG Research climate metrics used in MSCI’s standard
climate indexes,7 based on their potential suitability for measuring climate risk or climate impact.
• Climate metrics that measure climate impact are either directly measured as a temperature
impact, such as Implied Temperature Rise (ITR), or have explanatory power for temperature rise
in the atmosphere, such as absolute Scope 1 emissions measured in metric tons of CO2e.8
• Climate metrics that assess climate risk9 either estimate potential financial gains or losses as a
proportion of a company’s enterprise value, such as Climate Value at Risk (Climate VaR), or
indicate risk or opportunity exposures, which may explain potential financial risk under certain
climate scenarios.
Exhibit 2: Climate impact vs. climate risk metrics
7 MSCI Climate Indexes, MSCI, accessed Nov. 7, 2022.

8 A carbon dioxide equivalent, abbreviated as CO2e, is a metric measure used to compare the emissions from various GHG on the
basis of their global-warming potential (GWP), by converting amounts of other gases to the equivalent amount of carbon dioxide
with the same global warming potential. Eurostat, accessed Nov. 7, 2022.
9 In this paper, “climate risk” denotes both climate risk and climate opportunities.
RESEARCH INSIGHTS
Exhibit 3 explains the primary investment questions that different climate metrics aim to answer. To
understand how different these metrics are quantitatively, we computed their Spearman’s rank
correlation coefficient10 for the constituents of the MSCI ACWI Index. For most of the pairs, cross-
sectional correlations between MSCI climate metrics were below 0.5, suggesting that these metrics
are in fact measuring different aspects of climate risk or impact (Exhibit 4). We observed high
correlations among Carbon Emissions EVIC11 Intensity (Scope 1+2), Carbon Emissions Revenue
Intensity (Scope 1+2) and Transition Climate VaR.
Exhibit 3: Summary of MSCI ESG Research’s climate metrics
Climate metric Unit Investment question answered

Carbon Emissions tCO2e/USD For every USD 1 million of financing of the company, what is
EVIC Intensity million EVIC the amount of carbon emissions an investor will be
responsible for?
Potential Carbon MtCO2 What is the amount of potential carbon emissions (in
Emissions megatons of CO2) embedded in the fossil-fuel reserves (coal,
oil and gas) owned by a company?
ITR °C Is the company aligned with the 2°C or 1.5°C global warming
scenario? What is the temperature alignment level of the
company?
Carbon Emissions tCO2e/USD What is the amount of carbon emissions the company emits
Revenue Intensity million revenue to generate every USD 1 million of revenue?
Fossil Fuel % of total What is the company’s exposure to any of the fossil-fuel-
Revenue company related activities including thermal coal mining, oil and gas
revenue extraction, thermal coal-based power generation and oil and
gas-based power generation?
Cleantech % of total What is the company’s exposure to environmental and

Revenue company climate opportunities?
revenue
Low Carbon 0-10 score What is the company’s exposure to climate transition risk and
Transition (LCT) opportunities across its operations and supply chain, adjusted
Score where companies have strong efforts in place to mitigate
risks?
Transition % of market What is the net present value of future additional costs (as a
Climate VaR value % of the company’s market value) due to carbon pricing and
low-carbon opportunities?
Physical Climate % of market What is the net present value of future additional costs (as a
VaR value % of the company’s market value) due to the increase in a
firm’s exposure to physical hazards?
10 Spearman’s rank correlation coefficient is used to understand the strength and direction (negative or positive) of a relationship
between two variables that are not linearly related. Statistics Online Support, UT Austin, accessed Nov. 7, 2022.
11 EVIC = Enterprise value including cash
RESEARCH INSIGHTS
Exhibit 4: Low correlation across different climate metrics
Physical Climate VaR 0.31 0.39 (0.09) 0.15 0.11 (0.01) (0.10) 0.09 0.36
Transition Climate VaR 0.49 0.47 0.24 0.29 0.36 0.28 (0.39) 0.43 0.36
LCT Score 0.71 0.52 0.47 0.58 0.74 0.65 (0.34) 0.43 0.09
Cleantech Revenue (%) (0.11) (0.15) 0.14 0.01 0.00 (0.01) (0.34) (0.39) (0.10)
Fossil Fuel Revenue (%) 0.27 0.35 0.24 0.35 0.22 (0.01) 0.65 0.28 (0.01)
Carbon Emissions Revenue
0.88 0.42 0.26 0.55 0.22 0.00 0.74 0.36 0.11
Intensity (Scope 1+2)
ITR 0.54 0.65 0.32 0.55 0.35 0.01 0.58 0.29 0.15
Potential Carbon Emissions 0.26 0.42 0.32 0.26 0.24 0.14 0.47 0.24 (0.09)
Carbon Emissions EVIC
0.69 0.42 0.65 0.42 0.35 (0.15) 0.52 0.47 0.39
Intensity (Scope 3)
0.69 0.26 0.54 0.88 0.27 (0.11) 0.71 0.49 0.31
Intensity (Scope 1+2)
Carbon Carbon Potential ITR Carbon Fossil Cleantech LCT Transition Physical
Emissions Emissions Carbon Emissions Fuel Revenue Score Climate Climate
EVIC EVIC Emissions Revenue Revenue (%) VaR VaR
Intensity Intensity Intensity (%)
(Scope (Scope 3) (Scope
1+2) 1+2)
Data based on MSCI ACWI Index as of Dec. 30, 2022. Pairwise cross-sectional correlations are calculated on the largest
overlapping universe of issuers within the MSCI ACWI Index for which the respective metrics are available. Source:
MSCI ESG Research
Current vs. forward-looking metrics

The metrics can be further classified based on whether they are intended to measure current level or
projected future levels of climate risk or climate impact.
While current climate metrics generally consider data points such as current emissions, market
value of a company or revenue, forward-looking metrics may consider additional measures such as
GHG emissions reduction targets, future climate scenarios or projected future carbon prices in
different climate scenarios. Exhibit 5 summarizes the input data used for creating MSCI ESG
Research’s climate metrics.
RESEARCH INSIGHTS
Exhibit 5: Selected climate-related input data for MSCI ESG Research’s climate metrics
Current risk/impact data input Forward-looking data input

Metric Metric Emission Fossil fuel Low carbon Climate-risk Emission Transition- Fossil Physical-
type scopes production opportu- management targets risk fuel risk
/ revenue nities scenarios reserves scenarios
Current Carbon All Yes No No No No No No

climate Emissions scopes
impact EVIC Intensity
Forward- Potential No No No No No No Yes No

looking Carbon
climate Emissions
impact
ITR All Yes No No Yes Yes No No
scopes
Current Carbon All Yes No No No No No No

climate Emissions scopes
risk Revenue
Intensity
Fossil Fuel No Yes No No No No No No

Revenue
Cleantech No No Yes No No No No No
Revenue
LCT Score All Yes Yes Yes No No No No

scopes
Forward- Transition All Yes Yes No No Yes No No

looking Climate VaR scopes
climate
risk Physical No No No No No No No Yes
Climate VaR
Potential applicability for different use cases

In the Introduction, we highlighted various steps investors could consider when integrating climate-
change assessments into their investment process. Since each step in the process aims to address
different investment questions and are intended for different stakeholders, investors may require
distinct climate metrics at every stage of their investment process.
Investors could use the following criteria, which may help in understanding the potential applicability
of a given climate metric for specific use cases:
• Investor’s climate strategy
• General acceptability of the metric
• Availability of historical data
• Stability of the metric
RESEARCH INSIGHTS
Investor’s climate strategy

An investor’s (or a portfolio’s) climate strategy also determines which metrics are more aligned
compared to others to meet the underlying requirements. For example, for a low-carbon portfolio
strategy, Carbon Emissions EVIC Intensity and/or Carbon Emissions Revenue Intensity could be
more aligned compared to Fossil Fuel Revenue and/or Potential Carbon Emissions. However, these
two fossil-fuel-related metrics could be more appropriate for an ex-fossil fuel portfolio strategy
(Exhibit 6). In addition, climate strategies may include multiple objectives and hence may benefit
from the use of multiple metrics to align with each of those objectives.
Exhibit 6: Climate metrics aligned to portfolio’s climate strategy
Portfolio’s climate strategy Potential climate metrics

Carbon Emissions EVIC Intensity,
Low carbon, net-zero
Carbon Emissions Revenue Intensity
Potential Carbon Emissions,
Ex-fossil fuel
Fossil Fuel Revenue
Temperature / warming alignment ITR

Cleantech Revenue,
Cleantech / positive impact leaders
LCT Score & Categories
LCT Score & Categories,
Climate transition
Transition Climate VaR
Transition Climate VaR,

Climate cost / scenario resilient Physical Climate VaR,
Climate VaR
General acceptability of the metric

For use cases such as reporting, stewardship and engagement and target setting, where the target
audience includes a broad group of stakeholders, an industry-standard metric can be used as the
primary metric. Metrics such as Carbon Emissions EVIC Intensity, Carbon Emissions Revenue
Intensity and Cleantech Revenue have been mentioned by several initiatives and can thus be
considered generally acceptable metrics or industry standard metrics (Exhibit 7). However,
depending on the portfolio’s climate strategy and other regulatory or industry-specific requirements,
other metrics can be used as well.
Availability of historical data

Some investors may require climate metrics with a longer history to backtest their portfolio’s
climate-change strategy. Here, availability of historical data could be an important consideration
when determining a metric’s potential use for portfolio construction. Exhibit 8 highlights MSCI ESG
Research’s climate metrics with more than five years of history.
RESEARCH INSIGHTS
Exhibit 7: Potential alignment of MSCI ESG Research’s climate metrics with selected climate initiatives*
MSCI’s climate metric EU EU IIGCC- NGFS NZAMI NZAOA PCAF SBTi TCFD
CBR SFDR PAII
● ● ● ● ● ● ● ●
Intensity
Potential Carbon Emissions ● ● ● ● ● ●
ITR ● ● ● ● ●
Carbon Emissions Revenue
● ● ● ● ● ●
Intensity
Fossil Fuel Revenue ● ● ● ● ● ●
Cleantech Revenue ● ● ● ● ● ● ● ●
LCT Score ● ●
Transition Climate VaR ● ● ● ●
Physical Climate VaR ● ● ● ● ●
*This indicative mapping is provided to help illustrate how standard MSCI ESG & Climate data points may identify
indicators associated with non-regulatory Climate and Net-Zero initiatives. The information is provided “as is” and does
not constitute legal advice or binding interpretations of the said Climate and Net-Zero initiatives. MSCI’s mapping to the
indicators are based on assumptions and ongoing client feedback. This document aims to help clients seeking
alignment with various non-regulatory Climate and Net-Zero initiatives by mapping MSCI ESG Research LLC data points
to the corresponding initiative frameworks. We are committed to support our clients seeking to meet their regulatory
requirements by providing solutions designed to align with ESG regulations and guidelines.
EU CBR = EU Climate Benchmark Regulations; EU SFDR = EU Sustainable Finance Disclosure Regulation;
IIGCC-PAII = The Institutional Investors Group on Climate Change’s Paris Aligned Investment Initiative;
NGFS = Network for Greening the Financial System; NZAMI = Net Zero Asset Manager Initiative,
NZAOA = Net-Zero Asset Owners Alliance; PCAF = Partnership for Carbon Accounting Financials,
SBTi = Science-based Target Initiative; TCFD = Taskforce on the Climate-related Financial Disclosures
Sources:
MSCI ESG Research;
“Commission Delegated Regulation (EU) 2020/1818,” EU Commission, July 2020;
“TEG Final Report on Climate Benchmarks and Benchmarks’ ESG Disclosures,” EU TEG on Sustainable Finance, September
2019;
“Final Report on Draft Regulatory Technical Standards,” European Supervisory Authorities (ESAs), February 2021.
ANNEX to the Commission Delegated Regulation (EU) .../... supplementing Regulation (EU) 2019/2088 of the European
Parliament, EU Commission, April 2022;
“Net Zero Investment Framework (1.5oC): Implementation Guide,” PAII, March 2021;
“A Call for Action: Climate Change as a Source of Financial Risk,” NGFS, April 2019;
“Initial Target Disclosure Report,” NZAM Initiative, May 2022;
“Target Setting Protocol,” NZAOA, January 2022;
The Global GHG Accounting & Reporting Standard for the Financial Industry,” PCAF, November 2020;
“Foundations for Science-based Net-zero Target Setting in the Financial Sector,” SBTi, April 2022;
“Guidance on Metrics, Targets and Transition Plans”, TCFD, October 2021.
RESEARCH INSIGHTS
Exhibit 8: MSCI ESG Research’s climate metrics with more than five years of history
Climate metric
Potential Carbon Emissions
Carbon Emissions Revenue Intensity (Scope 1+2)
Fossil Fuel Revenue (%)
Cleantech Revenue (%)
LCT Score
Stability of the metric

For portfolio construction, the stability of the metrics may also be a key consideration for some
investors. Climate metrics which are highly volatile due to non-climate factors such as revenue or
enterprise value could lead to unwanted volatility and turnover in the portfolio. An historical analysis
for the volatility of MSCI ESG Research’s climate metrics with more than five years history is
provided in Exhibit 9.
Exhibit 9: Historical relative volatility of MSCI ESG Research’s climate metrics
Potential Carbon Carbon Emissions Fossil Fuel Cleantech LCT Score

Emissions Revenue Intensity Revenue (%) Revenue (%)
(Scope 1+2)
Low volatility
(% of constituents) 3.4% 59.9% 5.7% 13.0% 80.0%
Medium volatility
(% of constituents) 0.4% 24.8% 1.5% 7.8% 8.2%
High volatility
(% of constituents) 0.4% 12.9% 2.2% 15.1% 6.9%
Data — not applicable /

not available 95.8% 2.4% 90.7% 64.2% 4.9%
Average CV
(for MSCI ACWI IMI 0.22 0.28 0.41 0.60 0.12
Index constituents)
Overall metrics volatility
(based on average CV) Low Medium Medium High Low
Notes: (1) To assess the volatility of each metric, we first computed the coefficient of variance (CV) for each
constituent in the MSCI ACWI Index (as of Dec. 30, 2022) based on the monthly data from Dec. 29, 2017 to Dec. 30,
2022. For Potential Carbon Emissions, data range is from July 31, 2019 to Dec. 30, 2022. In the second step, Average
CV is computed as the simple average of CV of constituents in the MSCI ACWI Index.
(2) CV<0.25 (low volatility), CV=0.25 to 0.5 (medium volatility), CV>=0.5 (high volatility). Source: MSCI ESG Research
As explained above, the potential suitability of a climate metric for a given use case can be assessed
by understanding that metric’s industry acceptance, its historical volatility, availability of historical
data and the portfolio’s climate strategy.
RESEARCH INSIGHTS
Climate metrics summary

Climate metrics can differ substantially in terms of their scope and objectives. In addition, there are
factors such as metrics volatility and availability of historical data which can affect their suitability
for certain investment use cases. Further, investors may have widely different and/or multiple
climate objectives which means that a single solution or a single metric may not serve all.
It is therefore important for investors to select the right set of metrics to achieve their specific
climate investing objectives. Investors could consider several criteria as elaborated on in this toolkit
to understand various climate metrics and find the most suitable set which can support them in
meeting their specific requirements depending on the different stages of their climate investment
process.
RESEARCH INSIGHTS
In-depth overview of MSCI ESG Research’s climate metrics

In this section, we take an in-depth look at MSCI ESG Research’s climate metrics in terms of what
they measure, how they are calculated and their potential use cases.
• Carbon Emissions EVIC Intensity and Financed Emissions
• Potential Carbon Emissions
• ITR
• Carbon Emissions Revenue Intensity
• Fossil Fuel Revenue
• Cleantech Revenue
• LCT Score
• Transition Climate VaR
• Physical Climate VaR
RESEARCH INSIGHTS
Carbon Emissions EVIC Intensity and Financed Emissions

Carbon Emissions EVIC Intensity is a current climate impact metric which indicates the amount of
GHG emissions (in metric tons) an investor would be responsible for per USD 1 million of financing
of a company. Depending on the use case, a company’s GHG emissions can be based on Scopes 1,
2 or 3, either individually or on a combined basis.
This metric is computed as the ratio of a company’s GHG emissions and its EVIC and normalizing it
allows for a comparison of companies regardless of their size.
𝐺𝐻𝐺 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠
𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐸𝑉𝐼𝐶 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 =
𝐸𝑉𝐼𝐶
The metric is recommended by several regulatory and non-regulatory initiatives in the context of net-
zero portfolio construction and investments (Exhibit 7).
Computation of the metric at portfolio level
At the portfolio level, total GHG emissions are called Financed Emissions and are computed as per
methodology issued by the PCAF.12
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 = ∑ 𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐹𝑎𝑐𝑡𝑜𝑟𝑖 𝑥 𝐺𝐻𝐺 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖

𝑖
Where Attribution Factor for ith constituent in the portfolio is computed as below:
𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝐴𝑚𝑜𝑢𝑛𝑡𝑖
𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐹𝑎𝑐𝑡𝑜𝑟𝑠𝑖 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷𝑒𝑏𝑡𝑖
Here GHG Emissionsi, Outstanding Amounti and Total Equity and Debti denote the GHG emissions,
outstanding amount of loans and investments, and the total equity and debt13 respectively for the ith
constituent in the portfolio.
Financed Emissions are the total amount of GHG emissions financed by a portfolio through loans
and investments. Financed Emissions could also be normalized by dividing it by the portfolio value.
This normalized metric is referred to as Financed Emissions Intensity.
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠
𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 =
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑉𝑎𝑙𝑢𝑒
12 “The Global GHG Accounting & Reporting Standard for the Financial Industry.” PCAF, November 2020.
13 Please note that Financed Emissions defined by PCAF uses “sum of total equity and debt” of the constituents instead of EVIC.
RESEARCH INSIGHTS
Key strengths, limitations and possible use cases
Key strengths Limitations
• Recommended by many regulatory and non- • Sensitive to changes in the market value
regulatory bodies (EVIC) of the company
• Key metric for net-zero portfolio initiatives • For Financed Emissions, no clear market
• Can consider all three scopes of carbon standard for some asset classes
emissions • Does not consider climate scenarios,
• Enables portfolio decomposition and company targets or low-carbon
attribution analysis opportunities
Possible use cases

• Measurement: can be used for the carbon footprinting of portfolios
• Target setting: can be used to calculate financed emissions for net-zero target setting
• Portfolio construction: can be used for low-carbon portfolio construction, but not for portfolios
intending to align with a given climate scenario
• Risk management: monitoring companies with high Carbon Emissions EVIC Intensity
• Reporting: EU CBR/SFDR, IIGCC-PAII, NZAMI, NZAOA, PCAF, SBTi, TCFD
• Stewardship and engagement: can be used for engaging companies and establishing dialogue
with other stakeholders on low-carbon and net-zero investing
RESEARCH INSIGHTS
Exhibit 10: Distribution of Carbon Emissions EVIC Intensity for MSCI ACWI IMI
Source: MSCI ESG Research, as of Dec. 30, 2022
Exhibit 11: Carbon Emissions EVIC Intensity by region
Note: Index level Carbon Emissions EVIC Intensity values are computed as the weighted average of constituents’
Carbon Emissions EVIC Intensity and constituents’ weight in the index.
RESEARCH INSIGHTS
Exhibit 12: Carbon Emissions EVIC Intensity by MSCI ACWI IMI sector
Note: Index level Carbon Emissions EVIC Intensity values are computed as the weighted average of constituents’
Carbon Emissions EVIC Intensity and constituents’ weight in the index.
GHG intensity in EU Climate Benchmark Regulations

The EU, in its CBR, has recommended GHG intensity as the main parameter to calculate the decarbonization
trajectory. Here, GHG intensity means absolute GHG emissions divided by millions of euros in EVIC.
Since GHG intensity uses EVIC as the denominator, it could be volatile year-on-year (or from one time point to
another) due to fluctuations in the constituent securities’ market capitalization. This could also incorrectly be
interpreted as an improvement or deterioration, as applicable, in the benchmark’s carbon performance despite
limited changes in its carbon emissions profile.
To reduce the impact of market volatility, the EU has proposed adjusting the EVIC of each constituent in the
portfolio by dividing it by an enterprise value inflation adjustment factor (EVIAF). This EVIAF is calculated by
dividing the average EVIC of the benchmark constituents at the end of a calendar year by the average EVIC of the
benchmark constituents at the end of the previous calendar year. Therefore:
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑉𝐼𝐶𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑌𝑒𝑎𝑟
𝐸𝑉𝐼𝐴𝐹 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐸𝑉𝐼𝐶𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑌𝑒𝑎𝑟
𝐸𝑉𝐼𝐶
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐸𝑉𝐼𝐶 =
𝐸𝑉𝐼𝐴𝐹
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐺𝐻𝐺 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 =
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐸𝑉𝐼𝐶
Source: ANNEX to the Commission Delegated Regulation (EU) .../... supplementing Regulation (EU) 2019/2088 of
the European Parliament, EU Commission, April 2022.
RESEARCH INSIGHTS
Potential Carbon Emissions

It is estimated that 90% of known reserves of coal and 60% of oil and fossil methane gas will have to
remain unused to limit global warming to below 1.5°C.14 Investors can understand companies’
exposure to such potential stranded assets using MSCI’s Potential Carbon Emissions metric, a
forward-looking climate impact metric that indicates the amount of potential carbon emissions
embedded in fossil-fuel reserves (coal, oil and gas) owned by a company.
At the company level, they are computed as:
𝐸 = ∑𝑁
𝑖=1 𝑅𝑖 𝑥 𝑉𝑖 𝑥 𝐶𝑖 𝑥 𝑓
Where E denotes Potential Carbon Emissions (million metric tons of carbon dioxide) of the company.
Ri, Vi, and Ci respectively denote proven recoverable reserves (gigagrams), net calorific value of the
fuel (terajoules per gigagram) and carbon content of the fuel (metric tons of carbon per terajoule) for
fuel type “i” owned by the company. “f” is a conversion factor with a value of 3.6667 x 10-6.
Some investors may want to understand whether the fossil fuel reserves owned by a company are
used for energy purposes or not. MSCI ESG Research provides a screening factor which identifies
companies with evidence of owning fossil fuel reserves most likely used for energy applications. For
high intensity industries (such as energy, utilities, diversified metals and mining), this factor flags
companies with evidence of fossil fuel reserves ownership (excluding metallurgical coal). For other
industries, it flags companies with evidence of fossil fuel reserves ownership (excluding
metallurgical coal) and deriving revenue from business segments associated with energy application
of fossil fuels such as thermal coal mining, oil and gas exploration and production, and downstream
activities such as refining, distribution and retail, pipeline and transportation, trading and fossil fuel-
based power generation.
Potential Carbon Emissions could also be normalized by the size of company by dividing it by the
EVIC of the company. This normalized metric is called Potential Carbon Emissions Intensity.
At the company level, it is computed as:
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 =
𝐸𝑉𝐼𝐶
Like Carbon Emissions EVIC Intensity, this metric can also be adjusted for inflation in EVIC by using
the EVIAF:
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 =
𝐼𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐸𝑉𝐼𝐶
14 Welsby et al.,” Unextractable fossil fuels in a 1.5°C world.” Nature, 597, 230–234. 2021.
RESEARCH INSIGHTS

At the portfolio level, the metric is called Weighted Average Potential Carbon Emissions Intensity and
is computed as:
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦

𝑁
= ∑ 𝑤𝑖 ∗ 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑖

𝑖=1
Here wi, denotes the weight of constituent “i” in the portfolio.

• Identify companies exposed to fossil-fuel • Available only for companies that own
asset stranding risk fossil-fuels
• Enables portfolio decomposition and • Does not consider climate scenarios
attribution analysis
Possible use cases

• Measurement: can be used to identify companies with fossil-fuel ownership in portfolios or to
compare fossil-fuel exposure to scenario specific benchmarks
• Portfolio construction: can be used for constructing ex-fossil-fuel portfolios, but not for
portfolios intending to align with climate scenarios
• Risk management: monitor companies exposed to potential asset stranding risk
• Reporting: EU CBR, EU SFDR, among others
• Stewardship and engagement: can be used to identify and engage companies exposed to
potential fossil-fuel stranded assets
RESEARCH INSIGHTS
Exhibit 13: Distribution of Potential Carbon Emissions for MSCI ACWI IMI
Source: MSCI ESG Research, as at Dec. 30, 2022
Exhibit 14: Potential Carbon Emissions by region
Note: Index level Potential Carbon Emissions are computed as the sum of Potential Carbon Emissions of index
constituents.
RESEARCH INSIGHTS
Exhibit 15: Potential Carbon Emissions by MSCI ACWI IMI sector
Note: Index level Potential Carbon Emissions are computed as the sum of Potential Carbon Emissions of index
constituents.
RESEARCH INSIGHTS
Implied Temperature Rise

ITR is a forward-looking climate impact metric which estimates the global implied temperature rise
(in the year 2100 or later) if the whole economy had the same carbon budget overshoot or
undershoot as the company (or portfolio) in question.
The metric shows the warming potential of a financial asset based on its current GHG emissions
and projected future decarbonization trajectory. The key advantage of this metric is that it allows
investors to assess their alignment with key initiatives, such as the commitment to limit global
temperature increases to 2°C or 1.5°C. Several initiatives recommend the use of a warming-based or
temperature alignment metric, such as ITR, as a target metric (Exhibit 7).
MSCI calculates the ITR for a company (Exhibit 16) by applying the following steps:
1. Allocate a carbon emissions budget: calculate a company carbon budget in metric tons of
CO2e that the company can emit to be aligned with the target to keep global warming below
2˚C by 2100.
2. Project carbon emissions: project the company’s future emissions through 2070 based on
current emissions and reported emissions reduction targets.
3. Calculate carbon emissions budget overshoot/undershoot: calculate the difference between
a company’s carbon budget and projected cumulative carbon emissions as the company
level absolute carbon budget overshoot/undershoot and then divide it by the company’s
carbon budget to determine the relative budget overshoot/undershoot.
4. Convert the relative carbon budget overshoot/undershoot to the ITR:
5. ITR = 2°C + {company level relative carbon budget overshoot/undershoot × global 2°C
budget × TCRE Factor15}
Companies with cumulative projected emissions less than their allocated budget have an ITR value
under 2°C, while those exceeding the budget have an ITR higher than 2°C — the degree of
overshoot/undershoot vis-à-vis the carbon budget determines how high or low the ITR will be.
15The Transient Climate Response to Cumulative Carbon Emissions (TCRE) was established by the IPCC and provides a relationship
that links each additional unit of emissions emitted beyond the available remaining global 2°C carbon budget to degrees of
additional warming. The 2020 Measuring Portfolio Alignment Report recommends a TCRE factor of 0.000545°C warming per Gt
CO2 which is based on IPCC’s 2013 “The Physical Science Basis” report. Source: “Measuring Portfolio Alignment: Assessing the
position of companies and portfolios on the path to net zero,” Portfolio Alignment Team, Q4 2020.
RESEARCH INSIGHTS
Exhibit 16: ITR characteristics and description
Emissions reduction targets: the Climate Target and Commitments dataset

Emission reduction targets are a key input to the ITR as the targets, along with current emissions,
are used to estimate a company’s future emissions. While a growing number of companies are
committing to cut their carbon footprints to net-zero in the coming decades, targets that can
appear similar on the surface may turn out to differ in their details.
The Climate Target and Commitments dataset from MSCI ESG Research details and
standardizes the publicly stated commitments of most publicly listed companies, and thus
equips investors to better evaluate companies’ pledges to decarbonize and to compare
decarbonization commitments among companies.
The Climate Target scorecard evaluates a company’s climate commitments based on its:
• Comprehensiveness, which addresses whether a target is focused on all scopes and
geographic sources of the company’s total emissions.
• Ambition, which refers to the amount of the emissions reduction embedded in the target and
the target timeline.
• Feasibility, which refers to how much confidence an organization can have that a target will
be achieved.
RESEARCH INSIGHTS

To compute the portfolio-level ITR, firstly, the contribution of every portfolio constituent “i” to the
portfolio level carbon budget and overshoot/undershoot is computed. In the second step,
constituent level contributions are added to compute portfolio level budget and
overshoot/undershoot.
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐶𝑎𝑟𝑏𝑜𝑛 𝐵𝑢𝑑𝑔𝑒𝑡 = ∑ 𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖 ∗ 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐵𝑢𝑑𝑔𝑒𝑡𝑖

𝑖
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐶𝑎𝑟𝑏𝑜𝑛 𝐵𝑢𝑑𝑔𝑒𝑡 𝑂𝑣𝑒𝑟𝑠ℎ𝑜𝑜𝑡/𝑈𝑛𝑑𝑒𝑟𝑠ℎ𝑜𝑜𝑡

𝑁
= ∑ 𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖
𝑖
∗ 𝐶𝑜𝑚𝑝𝑎𝑛𝑦 𝐴𝑏𝑠𝑜𝑙𝑢𝑡𝑒 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐵𝑢𝑑𝑔𝑒𝑡 𝑂𝑣𝑒𝑟𝑠ℎ𝑜𝑜𝑡/𝑈𝑛𝑑𝑒𝑟𝑠ℎ𝑜𝑜𝑡𝑖
Where ownership of the portfolio constituent “i” is computed using the formula below for listed
companies.
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑉𝑎𝑙𝑢𝑒 ∗ 𝑤𝑖
𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖 =
𝐸𝑉𝐼𝐶𝑖
Here wi and EVICi denote the weight and enterprise value including cash respectively of the
constituent “i” in the portfolio. For unlisted companies, the denominator becomes the total equity
and debt of the constituent “i”, in line with the PCAF framework.
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑉𝑎𝑙𝑢𝑒 ∗ 𝑤𝑖
𝑂𝑤𝑛𝑒𝑟𝑠ℎ𝑖𝑝𝑖 =
𝑇𝑜𝑡𝑎𝑙 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷𝑒𝑏𝑡𝑖
In the third step, portfolio level relative carbon budget overshoot/undershoot is computed as the
ratio of Portfolio Carbon Budget overshoot/undershoot and Portfolio Carbon Budget, and finally the
Portfolio ITR is computed as:
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐼𝑇𝑅 = 20 𝐶 + (𝑝𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝑙𝑒𝑣𝑒𝑙 𝑟𝑒𝑙𝑎𝑡𝑖𝑣𝑒 𝑐𝑎𝑟𝑏𝑜𝑛 𝑏𝑢𝑑𝑔𝑒𝑡 𝑜𝑣𝑒𝑟𝑠ℎ𝑜𝑜𝑡 𝑜𝑟 𝑢𝑛𝑑𝑒𝑟𝑠ℎ𝑜𝑜𝑡

∗ 𝐺𝑙𝑜𝑏𝑎𝑙 20 𝐶 𝑏𝑢𝑑𝑔𝑒𝑡 ∗ 𝑇𝐶𝑅𝐸 𝑓𝑎𝑐𝑡𝑜𝑟)
RESEARCH INSIGHTS

• Takes a forward-looking view by • Does not consider low-carbon opportunities
considering climate scenarios and
• Relatively complex calculations
company targets
• Recommended by several regulatory and
non-regulatory initiatives
• Recognizes differentiated decarbonization
pathways across sectors and regions
• Enables portfolio alignment against a given
warming target
Possible use cases

• Measurement: can be used to measure the progress of portfolios and institutions towards
climate goals
• Target setting: can be used for ITR or warming-level targets
• Portfolio construction: can be used for constructing portfolios intending to align with a given
climate scenario
• Risk management: can be used to monitor companies with higher climate impact
• Reporting: on a company’s or a portfolio’s alignment with a given climate scenario
• Stewardship and engagement: can be used to support dialogue with portfolio companies on
decarbonization targets and alignment
RESEARCH INSIGHTS
Exhibit 17: Distribution of ITR for MSCI ACWI IMI
Exhibit 18: ITR by region
Note: Index level ITR is computed as per the Portfolio ITR formula explained earlier.
RESEARCH INSIGHTS
Exhibit 19: ITR by MSCI ACWI IMI sector
Note: Index level ITR is computed as per the Portfolio ITR formula explained earlier.
RESEARCH INSIGHTS
Carbon Emissions Revenue Intensity

Carbon Emissions Revenue Intensity is a current climate risk metric which indicates the amount of
carbon emissions (in metric tons) a company emits to generate every USD 1 million of revenue. At
the company level, it is computed as:
𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 =
𝑅𝑒𝑣𝑒𝑛𝑢𝑒
Depending on the use case, a company’s GHG emissions can be based on Scope 1, 2 or 3 emissions,
either individually or on a combined basis.
Unlike Carbon Emissions EVIC Intensity, Carbon Emissions Revenue Intensity uses company revenue
to normalize the emissions and can therefore be computed for unlisted companies — overcoming
one limitation of Carbon Emissions EVIC Intensity. This metric is recommended by several
regulatory and non-regulatory agencies such as the TCFD, EU SFDR and NZAOA, among others.

At the portfolio level, the metric is called Weighted Average Carbon Intensity (WACI) and can be used
to indicate a portfolio’s relative exposure to carbon-intensive companies. It is computed as:
𝑁
𝐺𝐻𝐺 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠(𝑖)
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑎𝑟𝑏𝑜𝑛 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦 = ∑ 𝑤𝑖 ∗
𝑅𝑒𝑣𝑒𝑛𝑢𝑒(𝑖)
𝑖=1
Here GHG emissions(i), wi and Revenue(i) denote the GHG emissions, the constituent weight in the
portfolio and company revenue respectively for company “i” in the portfolio.
RESEARCH INSIGHTS

• Recommended by many regulatory and • Does not consider climate scenarios,
industry bodies company targets or low-carbon
opportunities
• Can consider all three scopes of carbon
emissions • Could be highly volatile for certain
industries with high product price
• Enables portfolio decomposition and
fluctuations
Possible use cases

• Measurement: can be used to assess a portfolio’s relative exposure to carbon-intensive
companies
• Target setting: can be used for setting carbon emissions intensity targets for a portfolio
• Portfolio construction: can be used for low-carbon portfolio construction, but not for
portfolios intending to align with a given climate scenario
• Risk management: monitoring of companies with a high carbon intensity
• Reporting: GFANZ, IIGCC, NZAMA, NZAOA, SBTi, TCFD, among others
• Stewardship and engagement: can be used for engaging companies and establishing
dialogue with other stakeholders on low-carbon and net-zero investing
RESEARCH INSIGHTS
Exhibit 20: Distribution of Carbon Emissions Revenue Intensity for MSCI ACWI IMI
Exhibit 21: Carbon Emissions Revenue Intensity by region
Note: Index level Carbon Emissions Revenue Intensity values are computed as the weighted average of constituents’
Carbon Emissions Revenue Intensity and constituents’ weight in the index.
RESEARCH INSIGHTS
Exhibit 22: Carbon Emissions Revenue Intensity by MSCI ACWI IMI sector
Note: Index level Carbon Emissions Revenue Intensity values are computed as the weighted average of constituents’
Carbon Emissions Revenue Intensity and constituents’ weight in the index.
Difference between Carbon Emissions EVIC Intensity and Carbon Emissions Revenue Intensity
Carbon Emissions EVIC Intensity indicates the amount of carbon emissions for which an investor
will be responsible per USD 1 million of financing of the company. It is a climate impact indicator
and is recommended by EU CBR and GFANZ, among others, for net-zero target setting (Exhibit 7).
By contrast, Carbon Emissions Revenue Intensity indicates how carbon intensive a company’s
business model is by measuring the amount of carbon emissions a company emits to generate
USD 1 million in revenue, and is therefore a climate risk indicator. This metric is also
recommended by several climate reporting initiatives, including SBTi and TCFD (Exhibit 7).
RESEARCH INSIGHTS
Fossil Fuel Revenue

Fossil Fuel Revenue is a current climate risk metric which provides revenue estimates for a
company’s involvement in fossil-fuel-related businesses such as fossil-fuel extraction and
production and fossil-fuel-based power generation. This metric is computed as the sum of a
company’s revenue (%) exposure to:
1. The mining of thermal coal (including lignite, bituminous, anthracite and steam coal) and its
sale to external parties. It excludes revenue from metallurgical coal, coal mined for internal
power generation, intra-company sales of mined thermal coal and revenue from coal trading.
2. The extraction, production and refining of conventional and unconventional oil and gas.
3. Thermal-coal-based power generation, liquid-fuel-based power generation and natural-gas-
based power generation.
Given that fossil-fuel-based energy production and fossil-fuel-based power generation are major
contributors to global GHG emissions, a company/portfolio exposed to these business activities
could face increased risk exposure to climate transition risks in a low-carbon scenario.
This metric is aligned with the recommendations of several agencies and reporting guidelines,
including the EU CBR, EU SFDR, PAII, NZAOA and TCFD for portfolio monitoring, reporting and/or
construction.
At the portfolio level, the metric is computed as:
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐹𝑜𝑠𝑠𝑖𝑙 𝐹𝑢𝑒𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (%) = ∑ 𝑤𝑖 ∗ 𝐹𝑜𝑠𝑠𝑖𝑙 𝐹𝑢𝑒𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑖

𝑖=1
Here wi and Fossil Fuel Revenuei denote the weight and Fossil Fuel Revenue respectively for
constituent “i” in the portfolio.
RESEARCH INSIGHTS
• Simple metric that highlights companies • Does not consider carbon emissions and
most exposed to climate transition risk low-carbon opportunities
• Enables portfolio decomposition and • Does not capture companies’ forward-
attribution analysis looking strategies to reduce transition risk
• Can be used for engaging with the most or their performance in different climate
exposed companies scenarios
Possible use cases
• Measurement: can be used to calculate a portfolio’s exposure to companies with fossil fuel
revenue
• Portfolio construction: can be used for ex-fossil-fuel or low-carbon portfolio construction, but
not for portfolios intending to align with a given climate scenario
• Risk management: monitoring of companies with fossil-fuel revenue
• Reporting: EU CBR, EU SFDR, TCFD, PAII, among others
• Stewardship and engagement: can be used to identify and engage with companies exposed to
potential fossil-fuel stranded assets
Exhibit 23: Distribution of Fossil Fuel Revenue for MSCI ACWI IMI
Note: Exhibit excludes constituents with no fossil fuel revenue (out of 9,150 constituents, only 470 had Fossil Fuel
Revenue).
RESEARCH INSIGHTS
Exhibit 24: Fossil Fuel Revenue by region
Note: Index level Fossil Fuel Revenue is computed as the weighted average of constituents’ Fossil Fuel Revenue and
constituents’ weight in the index.
Exhibit 25: Fossil Fuel Revenue by MSCI ACWI IMI sector
Note: Index level Fossil Fuel Revenue is computed as the weighted average of constituents’ Fossil Fuel Revenue and
RESEARCH INSIGHTS
Cleantech Revenue
Cleantech Revenue is a current climate opportunity metric which provides revenue estimates for a
company’s involvement in six environmental impact themes: alternative energy, energy efficiency,
green building, pollution prevention, sustainable agriculture and sustainable water. At a company
level, Cleantech Revenue is computed as the total of all revenues derived from these six themes.
This metric is aligned with the recommendations of several agencies such as the EU CBR, EU SFDR,
PAII, NZAOA, SBTi and TCFD for portfolio monitoring, reporting, and/or construction (Exhibit 7).
At the portfolio level, the metric is computed as:
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑙𝑒𝑎𝑛𝑡𝑒𝑐ℎ 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (%) = ∑ 𝑤𝑖 ∗ 𝐶𝑙𝑒𝑎𝑛𝑡𝑒𝑐ℎ 𝑅𝑒𝑣𝑒𝑛𝑢𝑒𝑖

𝑖=1
Here wi and Cleantech Revenuei denote the weight and cleantech revenue respectively for
constituent “i” in the portfolio.
• Simple metric that highlights companies • Does not provide a forward-looking view of the
benefitting from a low-carbon transition company/portfolio for low-carbon opportunities
• Recommended by many regulatory and • Does not consider carbon emissions, fossil-fuel
industry bodies reserves, climate-risk management or
emissions targets
Possible use cases
• Measurement: can be used to identify companies benefitting from cleantech opportunities

• Portfolio construction: can be used for constructing cleantech portfolios, but not for portfolios
intending to align with a climate scenario or account for transition risk
• Reporting: EU CBR, EU SFDR, NZAOA, PAII, TCFD, among others
• Stewardship and engagement: can be used for engaging with companies on their cleantech
strategy
RESEARCH INSIGHTS
Exhibit 26: Distribution of Cleantech Revenue in MSCI ACWI IMI
Note: Exhibit excludes constituents with no cleantech revenues (out of 9,150 constituents, only 2,597 had such
revenues).
Exhibit 27: Cleantech Revenue by region
Note: Index level Cleantech Revenue is computed as the weighted average of constituents’ Cleantech Revenue and
RESEARCH INSIGHTS
Exhibit 28: Cleantech Revenue by MSCI ACWI IMI sector
Note: Index level Cleantech Revenue is computed as the weighted average of constituents’ Cleantech Revenue and
RESEARCH INSIGHTS
Low Carbon Transition Score and Categories

The LCT Score is a current climate risk metric which is designed to identify potential climate-
transition leaders and laggards by measuring a company’s current exposure to and management of
climate-transition risks and opportunities across its operations and supply chain. The final output of
this assessment are two company-level factors as described below:
1. LCT Category: This factor groups companies in five categories that highlight the predominant
risks and opportunities companies are most likely to face in the transition (Exhibit 29).
2. LCT Score: This score is based on a multi-dimensional risks and opportunities assessment and
considers both predominant and secondary risks a company faces. It is industry agnostic and
represents an absolute assessment of a company’s position vis-à-vis the low-carbon transition.
Exhibit 29: LCT Categories and Scores
RESEARCH INSIGHTS
At a company level, these metrics are computed by applying the following steps:
Step 1: Measure LCT Risk Exposure
The first step towards measuring the LCT Risk Exposure for a company is the computation of its
GHG emissions intensity profile, which is informed by its Product Carbon Intensity, Operational
Carbon Intensity and Total Carbon Intensity.16 We then compute the LCT Risk Exposure Category and
Score based on a company’s Total Carbon Intensity.
Step 2: Assess LCT Risk Management
In the second step, we assess a company’s management of risks and opportunities presented by the
low-carbon transition. This assessment is based on company policies and commitments to mitigate
transition risk, governance structures, risk management programs and initiatives, targets and
performance, and involvement in any controversies on five key issues from the Climate Theme in
MSCI ESG Ratings.17
Step 3: Calculate LCT Category and Score
In the final step, the LCT Risk Exposure Category and Score that have been calculated in Step 1 are
adjusted for the strength of management efforts. Following this adjustment, the LCT Risk Exposure
Score of companies with top or second quartile risk management improves and some companies
may move up one category.
At the portfolio level, the Low Carbon Transition Score is computed as:
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐿𝐶𝑇 𝑆𝑐𝑜𝑟𝑒 = ∑ 𝑤𝑖 ∗ 𝐿𝐶𝑇 𝑆𝑐𝑜𝑟𝑒𝑖

𝑖=1
Here wi and LCT Scorei denote the weight and LCT score respectively for constituent “i” in the
portfolio.
16 Operational Carbon Intensity = Scope 1+2 Intensity + Scope 3 Upstream Intensity; Product Carbon Intensity = Scope 3
Downstream Intensity – Avoided Emissions Intensity; Total Carbon Intensity = Operational Carbon Intensity + Product Carbon
Intensity.
17 Assessment is based on five key issues from Climate Theme in the MSCI ESG Ratings: Carbon Emissions, Product Carbon
Footprint, Financing Environmental Impact, Opportunities in Renewable Energy and Opportunities in Clean-tech.
RESEARCH INSIGHTS

• Comprehensive metric considers all scopes • Does not consider forward-looking climate
of emissions, low-carbon opportunities and scenarios
risk management
• Relatively complex calculations
• Enables portfolio decomposition and
• No explicit consideration of emissions
reduction targets
• LCT categories easy to understand
Possible use cases
• Measurement: can be used to calculate a portfolio’s exposure to transition risk and transition
opportunities in a symmetrical way
• Portfolio construction: can be used for constructing carbon transition portfolios, but not for
portfolios intending to align with a climate scenario
• Risk management: monitoring of companies in different LCT categories
• Stewardship and engagement: companies can be engaged with on their carbon-intensity
profile and carbon-risk management efforts
Exhibit 30: Distribution of LCT Score in the MSCI ACWI IMI
RESEARCH INSIGHTS
Exhibit 31: Average LCT Scores by region
Note: Index level LCT Score is computed as the weighted average of constituents’ LCT Score and constituents’ weight
in the index.
Exhibit 32: Average LCT Scores by MSCI ACWI IMI sector
Note: Index level LCT Score is computed as the weighted average of constituents’ LCT Score and constituents’ weight
in the index.
RESEARCH INSIGHTS
Climate Value-at-Risk
Climate VaR is a forward-looking climate risk metric which provides an assessment of both
dimensions of climate change — transition risk and physical risk — for a company. This metric
assesses how a company’s valuation could be impacted by climate-policy risks and physical climate
risks (from extreme weather events) and could benefit by a low-carbon technology transition. This
metric could support potential alignment with initiatives such as TCFD and NGFS that require stress-
testing and scenario analysis.
Climate VaR is based on two components: Transition Climate VaR and Physical Climate VaR and is
computed as the sum of these two measures. Transition Climate VaR is further broken into the
following two components:
• Policy Risk Climate VaR, which considers potential risks due to climate policies, and
• Technology Opportunities Climate VaR, which is based on potential profits due to cleantech
revenue and low-carbon technology patents.
Exhibit 33: Climate VaR components and computation
Policy Risk Climate VaR
Transition Climate VaR

Technology
Climate VaR
Opportunities Climate
Physical Climate VaR
Transition Climate VaR is computed as the sum of Policy Risk Climate VaR and Technology
Opportunities Climate VaR.
• Policy Risk Climate VaR is computed as the net present value of future additional costs (as a %
of a company’s enterprise value) due to carbon pricing. Future costs for a given climate scenario
are computed as the product of projected carbon emission reductions needed to meet a certain
temperature scenario and carbon price for that scenario. Net present value of future additional
costs is then normalized by the company’s market value (sum of its market capitalization and
market value of debt) to compute the Policy Risk Climate VaR.
• Technology Opportunities Climate VaR provides an estimate of future profits a company may
derive due to its involvement in low-carbon technologies. The low-carbon technology model is
based on estimated current low-carbon revenues as well as company-specific patent data. Net
present value of future profits is then normalized by the company’s market value to compute the
Technology Opportunity Climate VaR.
RESEARCH INSIGHTS
Physical Climate VaR is computed as the net present value of future additional costs or benefits (as
a % of a company’s market value) due to the increase or decrease in a company’s exposure to
physical hazards. Future expected costs are a function of risk exposure (e.g., company’s physical
asset, output), physical hazard attributes (e.g., intensity, duration) and vulnerability (expected cost as
a function of risk exposure and physical hazard) (Exhibit 34).
Finally, Climate VaR is computed as the sum of Transition Climate VaR and Physical Climate VaR.
Exhibit 34: High-level overview of physical risk computation
At the portfolio level, Climate VaR is computed as:
𝑃𝑜𝑟𝑡𝑓𝑜𝑙𝑖𝑜 𝐶𝑙𝑖𝑚𝑎𝑡𝑒 𝑉𝑎𝑅 = ∑ 𝑤𝑖 ∗ 𝐶𝑙𝑖𝑚𝑎𝑡𝑒 𝑉𝑎𝑅𝑖

𝑖=1
Here wi and Climate VaRi denote the weight and Climate VaR value respectively for constituent “i” in
the portfolio.
RESEARCH INSIGHTS

• Comprehensive metric considering all • Does not consider climate-risk
scopes of emissions, low-carbon management
opportunities and climate scenarios
• Sensitive to changes in the market value
• Considers physical risk and cost of capital for the company
• Closely aligns with the recommendations of • More volatile compared to other climate
the TCFD metrics
Possible use cases
• Measurement: can be used to measure potential climate costs on the portfolio in different
climate scenarios
• Portfolio construction: can be used for constructing “scenario resilient” portfolios by
considering future costs associated with certain climate change scenarios, but not for
portfolios intending to align with a climate scenario
• Risk management: can be used to monitor future climate impact on portfolios in different
climate scenarios
• Reporting: EU CBR, NGFS, TCFD, among others
• Stewardship and engagement: companies can be engaged with on their plans for reducing
potential climate costs to their assets and operations
Exhibit 35: Distribution of Transition and Physical Climate Equity VaR for MSCI ACWI IMI
RESEARCH INSIGHTS
Exhibit 36: Transition and Physical Climate Equity VaR by region
Note: Index level Transition/Physical Climate VaR is computed as the weighted average of constituents’
Transition/Physical Climate VaR and constituents’ weight in the index.
Exhibit 37: Transition and Physical Climate Equity VaR by MSCI ACWI IMI sector
Note: Index level Transition/Physical Climate VaR is computed as the weighted average of constituents’
Transition/Physical Climate VaR and constituents’ weight in the index.
RESEARCH INSIGHTS
Appendix:
Climate metrics factors
Climate metric Factor name on ESG Manager Column header
Carbon Emissions EVIC Intensity Carbon Emissions – Scope 1+2 CARBON_EMISSIONS_EVIC_

(Scope 1+2) Intensity (t/USD million EVIC) SCOPE_12_INTEN
Carbon Emissions EVIC Intensity Scope 3 – Total EVIC Intensity CARBON_EMISSIONS_SCOPE_3

(Scope 3) _TOT_EVIC_INTEN
Potential Carbon Emissions Total Potential Emissions (MtCO2) TOTAL_POTENTIAL_EMISSIONS
Implied Temperature Rise (ITR) Implied Temperature Rise (oC) ITR
Carbon Emissions Revenue Carbon Emissions – Scope 1+2 CARBON_EMISSIONS_SCOPE_12

Intensity (Scope 1+2) Intensity (t/USD million sales) _INTEN
Fossil Fuel Revenue (Thermal Coal – Maximum THERMAL_COAL_MAX_REV_PCT

Percentage of Revenue) + OG_REV_EXTRACTION_PROD
+ (O&G – Extraction and Production + OG_REV_REFINING
– Maximum Percentage of Revenue)
+ GENERAT_MAX_REV_FOSSIL
+ (O&G – Refining – Maximum _FUELS
Percentage of Revenue)
+ (Generation Fossil Fuels -
Maximum Percentage of Revenue)
Cleantech Revenue Environmental Impact Solutions - CT_TOTAL_MAX_REV

Maximum Percentage of Revenue
Low Carbon Transition Score Low Carbon Transition Score CBN_LCT_SCORE
Low Carbon Transition Category Low Carbon Transition Category CBN_LCT_CATEGORY
Transition Climate VaR18 2oC Aggregated Policy Risk Equity VAR_AGG_REG2_REMIND_NGFS

Climate VaR (REMIND NGFS Orderly) _ORDERLY_EQUITY
(%) + VAR_TEC2_REMIND_NGFS
+ 2oC Technology Opportunity Equity _ORDERLY_EQUITY
Climate VaR (REMIND NGFS Orderly)
(%)
Physical Climate VaR 2oC Aggregated Physical Risk Equity VAR_EXW_2DEG_ORDERLY_AGG

Climate VaR (REMIND Orderly _COMBINED_EQUITY
Aggressive Outcome) (%)
18 Transition
Climate VaR and Physical Climate VaR factors are available for various scenarios. The factors highlighted for Transition
Climate VaR correspond to 2oC REMIND NFGS Orderly scenario. Factors highlighted for Physical Climate VaR correspond to 2 oC
REMIND NGFS Orderly aggressive outcome scenario. Refer to ESG Manager for factors available for other scenarios.
RESEARCH INSIGHTS
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Understanding MSCIs Climate Metrics

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RESEARCH INSIGHTS

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Executive summary ..................................................................................................... 4

Exhibit 1: Different steps in the climate investment process

Source: MSCI ESG Research

Climate metrics selection: key criteria

Purpose of climate metrics

Climate impact vs. climate risk metrics

Exhibit 2: Climate impact vs. climate risk metrics

Source: MSCI ESG Research

7 MSCI Climate Indexes, MSCI, accessed Nov. 7, 2022.

Climate metric Unit Investment question answered

Cleantech % of total What is the company’s exposure to environmental and

Exhibit 4: Low correlation across different climate metrics

Current vs. forward-looking metrics

Current risk/impact data input Forward-looking data input

Current Carbon All Yes No No No No No No

Forward- Potential No No No No No No Yes No

Current Carbon All Yes No No No No No No

Fossil Fuel No Yes No No No No No No

LCT Score All Yes Yes Yes No No No No

Forward- Transition All Yes Yes No No Yes No No

Source: MSCI ESG Research

Potential applicability for different use cases

Investor’s climate strategy

Exhibit 6: Climate metrics aligned to portfolio’s climate strategy

Portfolio’s climate strategy Potential climate metrics

Temperature / warming alignment ITR

Transition Climate VaR,

General acceptability of the metric

Availability of historical data

Physical Climate VaR ● ● ● ● ●

Stability of the metric

Exhibit 9: Historical relative volatility of MSCI ESG Research’s climate metrics

Potential Carbon Carbon Emissions Fossil Fuel Cleantech LCT Score

Data — not applicable /

Climate metrics summary

In-depth overview of MSCI ESG Research’s climate metrics

Carbon Emissions EVIC Intensity and Financed Emissions

𝐹𝑖𝑛𝑎𝑛𝑐𝑒𝑑 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 = ∑ 𝐴𝑡𝑡𝑟𝑖𝑏𝑢𝑡𝑖𝑜𝑛 𝐹𝑎𝑐𝑡𝑜𝑟𝑖 𝑥 𝐺𝐻𝐺 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠𝑖

Key strengths, limitations and possible use cases

Key strengths Limitations

Possible use cases

Source: MSCI ESG Research, as of Dec. 30, 2022

Exhibit 11: Carbon Emissions EVIC Intensity by region

GHG intensity in EU Climate Benchmark Regulations

Potential Carbon Emissions

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠

𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠

Computation of the metric at portfolio level

𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦

= ∑ 𝑤𝑖 ∗ 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝐶𝑎𝑟𝑏𝑜𝑛 𝐸𝑚𝑖𝑠𝑠𝑖𝑜𝑛𝑠 𝐼𝑛𝑡𝑒𝑛𝑠𝑖𝑡𝑦𝑖

Here wi, denotes the weight of constituent “i” in the portfolio.

Key strengths, limitations and possible use cases

Key strengths Limitations

Possible use cases

Source: MSCI ESG Research, as at Dec. 30, 2022

Exhibit 14: Potential Carbon Emissions by region

Exhibit 15: Potential Carbon Emissions by MSCI ACWI IMI sector

Implied Temperature Rise

Exhibit 16: ITR characteristics and description

Source: MSCI ESG Research

Emissions reduction targets: the Climate Target and Commitments dataset