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MSCI KLD 400 Social Index: Definition, Examples, and Impact

Last updated 03/19/2024 by

Bamigbola Paul

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The MSCI KLD 400 Social Index, initially known as the Domini 400 Social Index, is a market capitalization-weighted stock index emphasizing companies with strong environmental, social, and governance (ESG) practices. Founded by Amy Domini, it reflects a growing interest in socially responsible investing (SRI). This article delves into its composition, methodology, real-world examples, investment opportunities, and the index’s significance in the ESG investing landscape.

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Understanding the MSCI KLD 400 Social Index

The MSCI KLD 400 Social Index is a vital tool for investors seeking companies with exemplary ESG practices. Established in 1990, it originated from the efforts of Amy Domini, a pioneer in socially responsible investing. Initially named the Domini 400 Social Index, it later transitioned to its current moniker under the administration of KLD Research & Analytics.

Composition and criteria

The index comprises 400 U.S. companies selected from the MSCI USA IMI Index, encompassing large, mid, and small-cap stocks. To qualify, companies must demonstrate superior ESG performance, emphasizing factors like employee treatment, product safety, environmental sustainability, and corporate governance. Exclusions cover industries such as alcohol, tobacco, gambling, and weapons technology, aligning with socially responsible investment principles.

Methodology and review process

Selection for the MSCI KLD 400 Social Index involves ongoing evaluation and quarterly reviews. Companies maintaining high ESG ratings are included, while those failing to meet criteria risk removal. New entrants must meet stringent ESG rating and controversy score thresholds, ensuring alignment with the index’s sustainability objectives.

Real-world implications

The index’s holdings reflect its commitment to ESG principles, with notable investments in leading technology firms like Microsoft, NVIDIA, and Alphabet. These companies consistently earn top ESG ratings, underpinning the index’s performance and reinforcing investor confidence in socially responsible investing.

Performance and returns

Historically, the MSCI KLD 400 Social Index has delivered competitive returns, outperforming its benchmark, the MSCI USA Index, over extended periods. With an annualized return of approximately 12% over a decade, it highlights the potential for strong financial performance alongside ethical considerations.

Investment opportunities

Investors keen on aligning their portfolios with ESG principles can access the MSCI KLD 400 Social Index through various investment vehicles. Exchange-traded funds (ETFs), such as those offered by iShares, provide opportunities to mirror the index’s performance and capitalize on its sustainable investing strategies.

Accessibility and availability

Investment in the MSCI KLD 400 Social Index is accessible to retail investors through ETFs and other financial instruments. This democratization of socially responsible investing enables individuals to integrate their values into their investment strategies while pursuing competitive returns.
Weigh the Risks and Benefits
Here are the pros and cons of exploring the MSCI KLD 400 Social Index:
  • Provides insight into companies with strong environmental, social, and governance (ESG) practices.
  • Aligns investment strategies with sustainability goals and societal values.
  • Offers competitive returns while promoting ethical investing.
  • Encourages corporate accountability and transparency regarding ESG performance.
  • Accessible to retail investors through exchange-traded funds (ETFs) and other investment products.
  • May exhibit sectoral biases, favoring industries with stronger ESG profiles.
  • Subject to market fluctuations and economic volatility, affecting investment returns.
  • Requires ongoing monitoring and evaluation of ESG criteria to maintain index integrity.
  • ETF fees and expenses may reduce overall investment returns.
  • Limited diversification compared to broader market indexes.

Real-world application of ESG principles

Illustrating the practical implications of ESG criteria, companies included in the MSCI KLD 400 Social Index exhibit a commitment to sustainability across various industries. For instance, Tesla’s focus on renewable energy and electric vehicles aligns with environmental objectives, while Microsoft’s initiatives in diversity and inclusion reflect social responsibility. By examining individual companies within the index, investors can gain insight into the diverse ways in which ESG principles are integrated into business operations.

Case study: Tesla Inc.

Tesla Inc., a prominent constituent of the MSCI KLD 400 Social Index, exemplifies sustainable practices in the automotive industry. Through its production of electric vehicles and investment in renewable energy solutions, Tesla reduces carbon emissions and promotes environmental stewardship. Additionally, Tesla’s commitment to workplace safety and employee well-being underscores its dedication to social responsibility, further enhancing its ESG profile.

Case study: alphabet inc. (google)

Alphabet Inc., the parent company of Google, demonstrates a multifaceted approach to ESG considerations. Beyond its core business of technology and innovation, Alphabet prioritizes environmental sustainability through initiatives such as carbon neutrality and renewable energy investments. Moreover, Alphabet’s emphasis on corporate governance and transparency enhances investor trust and reinforces its position as a responsible corporate citizen.

The evolution of ESG investing

As societal expectations and regulatory frameworks evolve, so too does the landscape of ESG investing. Recognizing the growing importance of sustainability and ethical considerations, investors are increasingly integrating ESG factors into their decision-making processes. This section explores the evolution of ESG investing and its implications for financial markets and corporate behavior.

Regulatory mandates and reporting standards

In response to escalating environmental concerns and social issues, regulators are imposing stricter mandates on corporate disclosures and reporting requirements. For example, the Task Force on Climate-related Financial Disclosures (TCFD) encourages companies to disclose climate-related risks and opportunities, promoting transparency and accountability. By adhering to standardized reporting frameworks,
companies enhance their ESG disclosures and facilitate informed investment decisions.

Stakeholder engagement and activism

Stakeholder engagement and activism play a pivotal role in driving corporate sustainability initiatives and holding companies accountable for their ESG performance. Shareholder resolutions, proxy voting, and collaborative engagement initiatives empower investors to advocate for ESG improvements within companies. As shareholders demand greater transparency and accountability, corporations are compelled to prioritize ESG considerations and integrate stakeholder feedback into their strategic decision-making processes.

Frequently asked questions

Is the MSCI KLD 400 Social Index suitable for all investors?

The MSCI KLD 400 Social Index is designed for investors with a specific interest in socially responsible investing (SRI). While it offers exposure to companies with strong ESG practices, investors should assess whether their financial goals align with the ethical considerations emphasized by the index.

How frequently does the MSCI KLD 400 Social Index undergo reviews?

The index undergoes quarterly reviews, ensuring that its constituents consistently meet the high ESG standards required for inclusion. This regular evaluation helps maintain the integrity of the index and reflects ongoing commitment to sustainable investing.

What are the key exclusion criteria for companies in the MSCI KLD 400 Social Index?

Excluded industries encompass alcohol, tobacco, gambling, nuclear power, adult entertainment, and weapons technology. Companies involved in these sectors are not considered for inclusion, reinforcing the index’s commitment to avoiding investments that conflict with ESG principles.

Can individual investors directly invest in the MSCI KLD 400 Social Index?

While individual investors cannot directly invest in the index, they can gain exposure to its performance through exchange-traded funds (ETFs) that replicate the MSCI KLD 400 Social Index. These ETFs offer a convenient way for retail investors to integrate socially responsible investments into their portfolios.

How has the MSCI KLD 400 Social Index performed compared to traditional market indexes?

Historically, the MSCI KLD 400 Social Index has demonstrated competitive returns, outperforming its benchmark, the MSCI USA Index, over extended periods. Investors interested in both financial performance and ESG considerations may find the index a compelling option.

What role does the MSCI KLD 400 Social Index play in the broader landscape of ESG investing?

The index serves as a pioneering force in ESG investing, reflecting a growing trend in the financial industry. Its emphasis on high ESG standards contributes to the broader conversation around sustainability, influencing corporate behavior and encouraging responsible investment practices.

Key takeaways

  • The MSCI KLD 400 Social Index prioritizes companies with strong ESG practices, reflecting a growing interest in socially responsible investing.
  • Selection criteria emphasize factors such as employee treatment, product safety, and environmental sustainability, while excluding industries deemed incompatible with ESG principles.
  • Investors can access the index through ETFs, providing opportunities to integrate sustainability considerations into their investment portfolios.
  • Historically, the index has delivered competitive returns, demonstrating the potential for strong financial performance alongside ethical considerations.

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