What Is the MSCI KLD 400 Social Index?
The MSCI KLD 400 Social Index is a market capitalization-weighted stock index focusing on companies that maintain high environmental, social, and governance (ESG) standards. It was founded by Amy Domini, one of the founders of KLD Research & Analytics, which helps administer the index, and previously known as the Domini 400 Social Index.
When the index was launched in May 1990, socially responsible investing (SRI) indexes were extremely rare, making the MSCI KLD 400 Social Index one of the first of its kind.
- The MSCI KLD 400 Social Index is a capitalization-weighted stock index focused on companies with reputations for social and environmental responsibility.
- It consists of large, mid and small-cap U.S. companies from the MSCI USA IMI Index with the highest ESG ratings.
- Companies dealing in alcohol, tobacco, gambling, nuclear power, adult entertainment, and weapons technology are excluded from consideration.
- Every quarter, the index is reviewed and companies risk being kicked out for others that score more favorably.
- Over the past few years, the index has been dominated by large American technology companies.
How the MSCI KLD 400 Social Index Works
The MSCI KLD 400 Social Index represents 400 publicly-traded companies that maintain high ESG ratings. As such, the index forms part of a broader universe of tools and investment products designed for investors who are concerned about the social and environmental impact of the assets they hold.
In keeping with this philosophy, potential candidates for the MSCI KLD 400 Social Index will likely have exemplary records on issues such as the treatment of employees, the safety of their products, the environmental sustainability of their supply chains, and their corporate governance practices. Examples of businesses that are excluded from consideration include companies dealing in alcohol, tobacco, gambling, nuclear power, adult entertainment, and weapons technology.
Any large, mid, or small-cap company in the MSCI USA IMI Index, barring those belonging to one of the excluded sectors, is eligible for inclusion. Companies in that particular index are graded based on their ESG and the highest-ranked ones make the MSCI KLD 400 Social Index. Companies that are deleted from the MSCI USA IMI Index or fail to maintain the requisite ESG ratings will be replaced by other companies that score more favorably, based on an ongoing review that takes place every quarter.
New entrants must have an MSCI ESG Rating above 'BB' and a MSCI ESG Controversies Score greater than 2 to stand a chance.
The selection universe for the MSCI KLD 400 Social Index are large, mid, and small-cap companies in the MSCI USA IMI Index.
Real World Example of the MSCI KLD 400 Social Index
As of March 31, 2023, the MSCI KLD 400 Social Index was primarily invested in large American technology companies such as Microsoft, NVIDIA, Alphabet, Tesla, and Visa. The largest individual holding was in Microsoft, which alone had a 10.60% weighting in the index.
Microsoft’s prominence in the MSCI KLD 400 Social Index is relatively unsurprising, considering the high ESG ratings that it has maintained in recent years. Microsoft is considered a leader in ESG issues, having maintained a “AAA” rating since 2016—the highest rating available from MSCI.
The MSCI KLD 400 Social Index returned roughly 12% on an annualized basis in the ten years to Mar. 31, 2023. That's a slightly better return than the MSCI USA Index, which is its benchmark and the universe from which it picks the most ESG-friendly stocks.
Did KLD get acquired by MSCI?
MSCI acquired RiskMetrics in 2010 in a bid to add ESG risk to its indexes. With that deal, came KLD, which was acquired by RiskMetrics the prior year.
Can I invest in the MSCI KLD 400 Social Index?
Yes, there are ways to invest in this index and generate similar returns, minus fees. iShares, for example, has an exchange-traded fund (ETF) that specifically mirrors the MSCI KLD 400 Social Index.
Who Founded the MSCI KLD 400 Social Index?
The MSCI KLD 400 Social Index was founded by Amy Domini, one of the founders of KLD Research & Analytics. Previously it was known as the Domini 400 Social Index.
The Bottom Line
The MSCI KLD 400 Social Index is one of many indexes used to gauge the performance of companies that maintain high environmental, social, and governance (ESG) standards. It was one of the first to take an interest in this type of thing and is essentially made up of the 400 highest ESG-rated stocks from the MSCI USA IMI Index, a broad index covering big, medium, and small-sized U.S. publicly traded companies.
MSCI periodically analyzes the ESG characteristic of eligible stocks and reviews the index’s constituents every quarter. Because its capitalization-weighted, big companies with a higher market cap receive a higher weighting. Over the past few years, its largest holdings have been big U.S. tech companies, led by Microsoft.