MSCI CEO: ‘To tackle climate change, financial markets must reallocate trillions of

The best thing about the Paris Climate Agreement was that it set a deadline of 2050 for achieving net-zero carbon emissions. The worst thing about the Paris Climate Agreement was that… it set a deadline of 2050 for achieving net-zero carbon emissions.

Establishing a deadline helped clarify how fast and how much emissions need to fall over the next few decades. Unfortunately, because the deadline remains so far in the future, it has contributed to a dangerous complacency.

The data tell us that net-zero investments will have to increase enormously–by trillions of dollars each year–for the world to have any hope of meeting the 2050 target.

Yet the single biggest obstacle to increasing those investments is commonly neglected or misunderstood–namely, the fact that global asset values and capital allocations do not adequately reflect long-term climate risks and opportunities.

To keep the 2050 goal within reach, that needs to change as soon as possible. This should be a top agenda item for the upcoming COP28 climate summit in Dubai.

Putting the challenge in perspective

A new UN Climate Change report says that if all countries met their nationally determined contributions under the Paris Agreement, global greenhouse gas emissions would peak this decade and drop to 2% below 2019 levels by 2030.

That sounds like progress. However, the UN Intergovernmental Panel on Climate Change says that emissions must decline dramatically faster–to 43% below 2019 levels by 2030–if the world hopes to limit global temperature rise to 1.5 degrees Celsius this century, another key ambition of the Paris Agreement.

When we look at publicly traded companies, we see that only 22% of the 9,000-plus constituents in the MSCI All Country World Investable Market Index were aligned with a 1.5-degree pathway as of Aug. 31, according to the latest MSCI Net-Zero Tracker.

In monetary terms, that pathway will require global clean-energy investments to increase from $1.8 trillion in 2023 to $4.5 trillion by the early 2030s, according to the International Energy Agency.

Such massive growth will entail an economic transformation on par with the Industrial Revolution. Any transformation of that magnitude must be driven by the finance and investment industries. Those industries depend on adequate data and accurate pricing. Unfortunately, the market for climate finance and investment is still lacking in both areas.

Indeed, when KPMG led a global survey of institutional asset owners managing a combined $34.5 trillion worth of investments, it found that the vast majority of them do not think financial securities properly capture climate risks.

More specifically, “only one of seven respondents believe public equity prices fully reflect climate risks, only one of 10 respondents believe alternative investment prices fully reflect climate risks, and only one of 12 respondents believe bond prices fully reflect climate risks.”

The emerging reallocation of capital

The task facing data providers is not simply to measure current emissions. After all, many companies with high emissions in 2023 are on course to achieve substantial reductions over time. The most meaningful climate data and tools must provide longer-term insights that show an extended emissions, risk, and opportunity trajectory, rather than just a momentary snapshot.

Such insights will help investors visualize not only what climate risks and opportunities look like today, but also what they might look like in 2030, 2040, and 2050. For example, houses located in U.S. flood zones could be overvalued by a combined $43.8 billion, based on climate risks and flood-zone maps, according to research from Miyuki Hino of the University of North Carolina and Marshall Burke of Stanford. Thus, more advanced climate tools are essential for investors to better assess the true long-term value of their assets, which will spur the repricing and capital reallocation that can accelerate progress toward net zero.

Better-informed investors and companies can fuel a virtuous cycle in which capital reallocation drives real-world decarbonization, and vice versa. This is especially true for voluntary carbon markets. A diverse range of analysts–from McKinsey and Boston Consulting Group to the MIT Climate & Sustainability Consortium and the Center for Strategic and International Studies–have shown that carbon credits can play a significant role in the net-zero journey, provided we have sufficient transparency around quality, pricing, and integrity.

Of course, the simplest way to promote net-zero asset repricing and capital reallocation would be some type of global carbon price. However, governments have found it politically difficult to make carbon pricing work effectively even at the national level, much less globally.

In the absence of global carbon prices, many investors have begun purchasing debt securities tied to emissions levels–in other words, securities whose price reflects the issuer’s carbon footprint. As of last year, such climate-focused financial instruments had mobilized roughly $1.6 trillion in capital, according to World Bank economist Federica Zeni.

“By combining the global nature of capital markets with the incentives of carbon pricing,” writes Zeni, “these securities have the potential to play a pivotal role in reducing carbon emissions.”

COP28 offers a unique platform for advancing net-zero collaboration across industries. While public attention often focuses on the energy industry, finance and investment are absolutely essential to large-scale climate solutions. The world urgently needs a faster repricing of assets and reallocation of capital, and data can help us there.

Henry Fernandez is the chairman and CEO of MSCI.

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