Asset Management

MSCI Uses Index To Police Climate Progress

Editorial Staff 21 April 2021

MSCI Uses Index To Police Climate Progress

A new report published by global data provider MSCI is calling on capital markets to up their game to avert a climate crisis and is issuing a quarterly corporate report card to show progress. It comes as climate heads the political agenda this week.

Ahead of Earth Day on 22 April, with new carbon targets being set by Westminser and the US hosting a green summit this week, climate is back on the agenda. In the midst of political activity, ratings agency MSCI has announced that it will start producing a quarterly scorecard showing how global corporates are performing on emissions, based on its All Country World Investable Markets Index.

Companies listed on the index currently emit the equivalent of 11.2 gigatons of carbon dioxide annually, according to the firm. (One gigaton is equal to one billion tons.) It estimates that if these companies stay at their current pace, emissions will reach 16.8 gigatons of CO2 by 2050, the equivalent of the planet warming by 3.5 C by the end of the century, and well above the 1.5 degree threshold agreed in Paris. The all-country index is a useful measure that tracks around 9,000 listed companies with a market value of $70 trillion operating in 50 markets.

Often lost in the flurry of net-zero pledges from companies and countries is a well-articulated plan, including short-term milestones, to meet these promises.

MSCI says that publishing quarterly results from the index will show which companies and sectors are making the most progress and which ones are lagging.

“On the current trajectory, the index will be scarcely greener in 2050 than in 2020," MSCI chair and chief executive, Henry Fernandez, said. The firm estimates that 80 per cent of companies are blowing emissions budgets that would keep them within the 2 C target. "This is not a path to net zero," Fernandez said.

In a new report titled The Role of Capital In The Net-Zero Revolution, the analyst is asking asset owners, including sovereign wealth funds, pension funds, endowments, insurance companies, to start setting year-on-year decarbonisation targets for their portfolios in a collective effort to bring down total global emissions by 10 per cent a year.

It wants asset managers to develop risk management and reporting expertise following rules set out by the Task Force on Climate-related Financial Disclosures (TCFD); and it wants banks to be more innovative in their corporate lending and equity issuance, tying terms to net-zero objectives. Companies that are setting net-zero emissions targets should articulate "credible and specific strategies" to achieve these reductions, the report said.

“By acting as the objective and transparent measure of progress, we can help drive accountability, reflect the voice of the world’s largest investors, and identify the companies making progress to power the systemic transformation needed,” Fernandez said.

The UK government, which has been leading on climate, in ambition at least, has also announced new goals to reduce carbon emissions by 78 per cent by 2035, bringing the previous target forward by 15 years, and making aviation and shipping accountable for the first time. Its climate committee says that £50 billion will need to be invested annually in order to meet these goals.

Similar commitments are expected from Washington on Thursday when President Biden lays out a green path for the US economy.

Meanwhile, the target isn't getting any smaller. The International Energy Agency (IEA) has forecast a major surge in CO2 emissions this year as economies bounce back from the pandemic.

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