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.

Founded in 1990, it was previously known as the Domini 400 Social Index and was named after Amy Domini, one of the founders of KLD Research & Analytics, which helps administer the index.

Key Takeaways

  • The MSCI KLD 400 Social Index is a stock index focused on companies with reputations for social and environmental responsibility.
  • Its candidates are selected from among large and prominent corporations headquartered in the United States.
  • The returns of the MSCI KLD 400 Social Index have historically been similar to those of mid and large-cap U.S-based stock indices.

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, and weapons technology.

The index is deliberately focused on large-cap stocks, requiring candidates to be U.S.-based and listed on either the New York Stock Exchange (NYSE) or the Nasdaq exchange. Companies that 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 in April of each year.

Real World Example of the MSCI KLD 400 Social Index

As of December 1, 2020, the MSCI KLD 400 Social Index was primarily invested in large American technology companies such as Microsoft (MSFT), Facebook (FB), and Alphabet (GOOG). The largest individual holding was in Microsoft, representing over 9% of the total.

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. According to research by MSCI, Microsoft is considered a leader in ESG issues among the American technology sector, having maintained a “AAA” rating since 2016—the highest rating available from MSCI. The company performed particularly well in issues of corporate governance, sustainable technology development, privacy issues, and lack of corruption. 

Overall, the MSCI KLD 400 Social Index has returned roughly 13% on an annualized basis since October 30, 2010. By way of comparison, the MSCU USA Index, which is used as its benchmark for performance assessment purposes, also returned 13% over the same timeframe.