ESG Issue Report: Creating Value in Underserved Markets ... - MSCI

ESG Issue Report: Creating Value in Underserved MarketsExecutive Summary March 2013KEY FINDINGS• Regulatory pressure, industry restructuring and the need to protect brand value are pushing companies to seek newsources of revenues. Meanwhile shifting demographics, changing consumer needs, and substantial growth inemerging markets are creating opportunities for companies to serve social needs in a commercial way.• Substantial roadblocks hamper companies’ ability to reposition their strategies for these new markets. Challengesinclude inadequate infrastructure, lack of distribution channels, unique consumer behavior, and risks of bribery andcorruption.• This report highlights our approach to identifying the large‐ and mid‐cap companies that are leading the way infinding innovative and scalable business models to tap this growing market, demonstrating a more accessible wayfor investors seeking both to increase their exposure to high growth segments of the next decade and to augmentthe positive social impact of their investment beyond small‐scale impact investment.•Creating Social Value, Top Picks vs. Industry Peers in MSCI All Country World IndexTop MSCIPicks ACWISocial Impact & Business Opportunities# of companies in Consumer Sector 8 250 ‐ One third of the world's population is affected by obesityor undernutrition.% of revenues from healthy and> 30% < 5% ‐ Health and wellness products are worth USD 663 Billionnatural productsin 2012, a 25% increase from 2007.# of companies in Financials Sector 7 550 ‐ Three billion people worldwide are underbanked.% increase in SME Financingyear-to-year> 20% < 15%‐ This segment represents more than USD 2 trillion inunmet credit needs in emerging markets.# of companies in Healthcare Sector 8 290 ‐ Twenty million deaths every year from top 10 diseases% of companies with 3 productsfor Top 10 Diseases in thedeveloping world> 70% < 30%‐ Annual global health spending will reach USD 1.2trillion by 2016 with emerging markets accounting for30%.# of companies in Telecom Sector 5 135 ‐ Approximately 75% of the developing world populationhas no access to the Internet as of 2012.% of companies with serviceofferings for disadvantagedgroups(elderly, children, people with disabilities,low- income household, remote places)> 50% < 10%‐ Telecom services revenue s in emerging markets willgrow five times faster than developed markets thisyear.Source: WHO, IFC, Mc Kinsey, Euromonitor, IMS Health, Pyramid Research, MSCI ESG ResearchThis is an executive Summary version of the ESG Issue Report. The full version – including detailed sections oneach Key Issue - is available to clients on ESG Manager or by contacting esgclientservice@msci.com.TOP COMPANIESAutogrill GileadAspen PharmacareGlaxoSmithKlineBanco Bradesco Manulife FinancialBank Rakyat Merck KGaABank of China Natura CosmeticosBecton DickinsonVodacomBT Group Standard Food… see more on p 5SCOPEMSCI ESG Research analyzes and benchmarks morethan 1000 companies annually on their ability tocreate value in underserved marketsREPORT CONTENTInvestment Approaches p. 2Top‐Performing Companies p. 3The Business Case p. 4Geographic Exposure p. 5For the following sections, see full report:Opportunities in Nutrition and HealthAccess to FinanceAccess to HealthcareAccess to CommunicationAUTHORSJulia Giguere, Emily Chew, Amandine Marques,Veronique Menou© 2011 MSCI, Inc. All rights reserved. Please refer to the disclaimer at the end of this document.Page 1 of 7

ESG Issue report: Adding Value In Underserved Markets – Executive SummaryMarch 2013IDENTIFYING TOP PERFORMING COMPANIESMSCI ESG research analyzes more than 1,000 companies annually on their ability to create value in underserved markets. The result of this analysis is reflected in the“social opportunities” 1 theme score of MSCI ESG Ratings Research (IVA) (see Appendix C for methodology). We have identified 28 companies that are particularly wellplaced to capitalize on future growth opportunities (see Figure 1). Companies were selected based on their exposure to underserved markets, their capacity to fill socialneeds, their ability to respond to specific local constraints and their overall ESG performance.FIGURE 1Best Performing CompaniesCONSUMERFINANCETicker Companies Country Sub industry IVA Ticker Companies Country Sub industry IVAAGL Autogrill FR Restaurants AAA BBD Banco Bradesco BR Diversified Banks AAABN Danone FR Packaged Food & Meat AAA MFC Manulife Financial Corp CA Life & Health Insurance AASBRY J Sainsbury UK Food retail AAA SREN Swiss Re CH Reinsurance AAOR L'Oreal FR Household & Personal Products AAA STAN Standard Chartered UK Diversified Banks AANATU3 Natura Cosmeticos BR Household & Personal Products AAA AXISBANK AXIS Bank IN Diversified Banks BBBWFM Whole Foods Market US Food retail AA BBRI Bank Rakyat Indonesia ID Diversified Banks BBPEP PepsiCo US Soft Drinks A BKCHN Bank of China CN Diversified Banks B1227 Standard Foods TW Packaged Food & Meat AHEALTHCARETELECOMMUNICATIONTicker Companies Country Sub industry IVA Ticker Companies Country Sub industry IVAMRK Merck KGaA DE Pharmaceuticals AAA BT.A BT Group GB Integrated Telecom AAANOVO B Novo Nordisk A/S DK Pharmaceuticals AA VOD Vodacom Group Limited ZA Wireless Telecom AAAGSK GlaxoSmithKline UK Pharmaceuticals AA TLSN TelisaSonera AB SE Integrated Telecom AABDX Becton, Dickinson & Co. US Healthcare Equipment & Supplies AA IAM Maroc Telecom S.A. MA Integrated Telecom AGILD Gilead Sciences US Biotech A FTE France Telecom S.A FR Integrated Telecom ASAN Sanofi S.A. FR Pharmaceuticals ADRREDDY Dr. Reddy’s IN Pharmaceuticals BBBAPN Aspen Pharmacare ZA Pharmaceuticals BB1 The social opportunities theme score is the weighted average of four key issues including access to healthcare, opportunities in nutrition and health, access to communication and access to finance.© 2011 MSCI, Inc. All rights reserved. Please refer to the disclaimer at the end of this document. Page 3 of 7

ESG Issue report: Adding Value In Underserved Markets – Executive SummaryMarch 2013THE BUSINESS CASE FOR ADDRESSING UNDERSERVED MARKETSNew consumer trends towards health and wellbeing, in addition to market potential in emerging markets resulting from high rates of economic growth, a rising middle class,and urbanization, are creating significant business opportunities for companies to fill social needs. Conversely, challenges exist in the long‐term for companies that fail toaddress underserved markets, including industry restructuring, more stringent regulations, and possible litigation, which have the potential to reduce business activities,damage brand value and negatively impact companies’ bottom line.FIGURE 2Macro Trends Creating Opportunities to Fill Social NeedsPush FactorsPull FactorsIndustry restructuring•Healthcare: ‘patent cliff’ and pricingpressure•Financials: crisis of faith andregulatory pressureSocial OpportunitiesChanging Consumer Needs•Euromonitor estimates that food andbeverages marketed for their health andwellness benefits are worth $US 663 Billion in2012 a 25% increase from 2007.•Fewer than 30% of Consumer companieson MSCI ACWI generate more than 5% oftheir total revenues in healthy & naturalproducts.Regulatory RisksAccess toHealthcareAccess toFinanceGrowth in Emerging Markets•Consumer: food ban and taxes andmore robust labeling requirements•Financials: requirements towardsunderserved marketsAccess toCommunicationOpportunities inNutrition & Health•The OECD estimates that by 2020 Asia couldrepresent about 50% of the world middle classup from 25% today.•The top 20 companies in Financials,Healthcare, Telecommunication andConsumer Staples generate an estimated14% of their sales from the fastestgrowing economies.Base of the PyramidLitigation RiskFood: The next Tobacco?•JP Morgan estimates that there is potential forinvested capital to reach up to US$1 trillion andprofit up to US$667bn across five industries• Approximately 21% of financialcompanies are involved in the directprovision of microfinance.Source: MSCI ESG Research© 2011 MSCI, Inc. All rights reserved. Please refer to the disclaimer at the end of this document. Page 4 of 7

ESG Issue report: Adding Value In Underserved Markets – Executive SummaryMarch 2013GROWING NEEDS FOR PRODUCTS AND SERVICESFIGURE 4Telecommunication Penetration Rates and Skills LevelsTo assess company‐ and industry‐level exposure to underserved markets, wecreated country‐level indexes for four issues including Access to Finance,Communication, Healthcare and Nutrition as illustrated in the following figures (formore details about the methodology, see Appendix C)FIGURE 3Underbanked PopulationLEGENDHigh opportunities(low access to communication)Low opportunities(high access to communication)Source: MSCI ESG Research, International Telecommunication Union (ITU)While telecom services penetration is high in developed markets, Africa, India andSouth East Asia show the greatest needs for telecom infrastructures. In addition,the ability to use technology based on literacy and education level is favorable inIndia and some countries in South East Asia and Africa (see figure 4) resulting insignificant opportunities for several industries including Alternative Carriers,Integrated and Wireless TelecomHigh opportunity(underpenetrated geography)Low opportunity(geography with access to finance)FIGURE 5Out‐of‐Pocket Expenditure and Concentration of PhysiciansSource: Consultative Group to Assist the Poor (2009), IMF (2009), MSCI ESG ResearchThe proportion of underbanked people is significant in both developed andemerging markets; however, the BRIC countries along with Africa and SoutheastAsia present the highest rates of underbanked populations (see figure 3). Weassess companies exposed to the issue in the Banks, Consumer Finance, DiversifiedFinancials and Insurance industries.High opportunities(low access to healthcare)Low opportunities(high access to healthcare)Source: MSCI ESG Research, World BankA low concentration of physicians and high out‐of‐pocket expenditure signals amore pressing need for access to healthcare products and services. There is lowavailability of healthcare services and products in Africa, Asia and Latin America,offering potential new markets to healthcare industries including HealthcareEquipment and Supplies, Biotechnology and Pharmaceuticals (see figure 5).© 2011 MSCI, Inc. All rights reserved. Please refer to the disclaimer at the end of this document. Page 5 of 7

ESG Issue report: Adding Value In Underserved MarketsMarch 2013December 2012About MSCIMSCI Inc. is a leading provider of investment decision support tools toinvestors globally, including asset managers, banks, hedge funds and pensionfunds. MSCI products and services include indices, portfolio risk andperformance analytics, and governance tools.The company’s flagship product offerings are: the MSCI indices which includeover 120,000 daily indices covering more than 70 countries; Barra portfoliorisk and performance analytics covering global equity and fixed incomemarkets; RiskMetrics market and credit risk analytics; ISS governanceresearch and outsourced proxy voting and reporting services; FEA valuationmodels and risk management software for the energy and commoditiesmarkets; and CFRA forensic accounting risk research, legal/regulatory riskassessment, and due‐diligence. MSCI is headquartered in New York, withresearch and commercial offices around the world.Contact UsNorth America Europe+1 212 804 5299 +44 (0)207 618 2510Asia Pacific+612 9033 9339Emailesgclientservice@msci.comMSCI ESG Research reports are provided by Institutional Shareholder Services Inc. ("ISS"),an indirect wholly‐owned subsidiary of MSCI Inc. ("MSCI"). MSCI is a publicly tradedcompany on the NYSE (Ticker: MSCI). As such, MSCI is not generally aware of whom itsstockholders are at any given point in time. ISS has, however, established policies andprocedures to restrict the involvement of any of MSCI's non‐employee stockholders, theiraffiliates and board members in the content of ISS' analyses. Neither MSCI's non‐employeestockholders, their affiliates nor MSCI's non‐management board members are informed ofthe contents of any of ISS analyses prior to their publication or dissemination.Issuers mentioned in this document may have purchased self‐assessment tools andpublications from ISS Corporate Services, Inc. (“ICS”), a wholly‐owned subsidiary of ISS, orICS may have provided advisory or analytical services to the issuer. No employee of ICSplayed a role in the preparation of this document. Any issuer that is mentioned in thisdocument may be a client of ISS, ICS, ISS’ parent company, MSCI Inc., or a subsidiary ofMSCI Inc., or may be the parent of, or affiliated with, a client of ISS, ICS, MSCI Inc., oranother MSCI Inc. subsidiary. If you are an ISS institutional client, you may inquire aboutany issuer's use of products and services from ICS by emailing disclosure@msci.com.This document and all of the information contained in it, including without limitation alltext, data, graphs, charts (collectively, the “Information”) is the property of ISS, itssubsidiaries, or in some cases third‐party suppliers. The Information may not bereproduced or redisseminated in whole or in part without prior written permission of ISS.The Information has not been submitted to, nor received approval from, the United StatesSecurities and Exchange Commission or any other regulatory body. None of the Informationconstitutes an offer to sell (or a solicitation of an offer to buy), or a promotion orrecommendation of, any security, financial product or other investment vehicle or anytrading strategy, and ISS does not endorse, approve or otherwise express any opinionregarding any issuer, securities, financial products or instruments or trading strategies.The user of the Information assumes the entire risk of any use it may make or permit to bemade of the Information.ISS MAKES NO EXPRESS OR IMPLIED WARRANTIES OR REPRESENTATIONS WITH RESPECT TOTHE INFORMATION AND EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING,WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY,TIMELINESS, NON‐INFRINGEMENT, COMPLETENESS, MERCHANTABILITY AND FITNESS FORA PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.Without limiting any of the foregoing and to the maximum extent permitted by law, in noevent shall ISS have any liability regarding any of the Information for any direct, indirect,special, punitive, consequential (including lost profits) or any other damages even ifnotified of the possibility of such damages. The foregoing shall not exclude or limit anyliability that may not by applicable law be excluded or limited.© 2011 MSCI, Inc. All rights reserved. Please refer to the disclaimer at the end of this document. Page 7 of 7