February 28, 2024

A house is seen destroyed after the Hurricane Delta in Creole, Louisiana, the United States, on October 10, 2020. The photo was taken with a drone.

Adrees Latif | Reuters

Climate change is the greatest challenge facing humanity, and its consequences are already all too obvious.

According to the United Nations Office for Disaster Risk Reduction, the number of climate disasters has increased dramatically over the past two decades, resulting in the deaths of over 1.2 million people for a total of more than 4 billion people.

The world’s reaction so far has been insufficient to counter this existential threat to our planet. The company’s current CO2 emissions targets are insufficient to avert a climate catastrophe.

On their current path, listed companies will hardly be more environmentally friendly in 2050 than they are today. An estimated 80% of companies are exceeding the emissions budget required to keep global warming below 2 degrees Celsius.

MSCI’s analysis of the All Country World Investable Markets Index (MSCI ACWI IMI) – a measure of approximately 9,000 publicly traded companies in 50 developed and emerging markets with a market value of over $ 70 trillion – found that these companies are currently an estimated 11, 2 gigatons of carbon emit dioxide equivalent (CO2e).

Our model shows that without changing current practices, these companies will emit 16.8 gigatons of CO2e by 2050, resulting in a planet 3.5 ° C warmer by the end of the century. This development shows the enormous challenge in reaching net zero and the urgency to act now.

Tackling climate change requires the greatest rebuilding of the global economy since the industrial revolution, and it is the owners of capital – whether institutions or individuals – who are vital to this market-wide transformation.

It is in their best interest to do so – in addition to saving the world, they will save their portfolios through long-term sustainable investments. The effects of climate change will have a significant impact on the pricing of financial assets, the risk and return on investments, and access to and costs of capital.

Tackling climate change requires the greatest rebuilding of the global economy since the industrial revolution, and it is the owners of capital – whether institutions or individuals – who are vital to this market-wide transformation.

Capital owners must immediately start reallocating their capital in line with widely accepted climate scenarios for less emission-intensive investments.

There are three general approaches that asset owners should take to focus action and increase the pace and scalability of their impact.

First, capital owners should aim for year-over-year decarbonization to reduce total global carbon emissions by nearly 10% per year.

To that end, they could reduce their exposure to investments most at risk from climate change, while redirecting capital to rapidly developing clean energy alternatives and green technologies and infrastructures to drive a net-zero economy. This may require a shift in strategic asset allocation and risk management for institutional asset owners.

Second, asset owners need to monitor whether their shift in capital allocation is having the desired effect by greening not only their own portfolios but also the global economy more generally. You need to be willing to use intense shareholder engagement as additional leverage for companies that are lagging behind.

Third, capital owners should move to an investment policy benchmark that provides a clear direction and point of reference to help portfolios move toward net zero. For example, a climate index could be an option for certain wealth owners who are actively promoting the path to a net-zero economy.

Other capital market participants also play a crucial role in accelerating change. For example, asset managers need to build expertise to support investments in clean energy, green technology and infrastructure.

Banks need to fund entrepreneurs and innovators with the capital needed to invest and scale greener businesses, while moving to net zero requires new types of securities and green lending practices.

Achieve net zero goals

Climate data and model providers like MSCI must also do their part by providing the transparency needed to assess the progress of decarbonization. MSCI will publish the MSCI ACWI IMI Net-Zero Tracker quarterly.

This report uses MSCI ACWI IMI’s aggregate temperature alignment with a trajectory of 1.5 ° C and highlights the companies and sectors in the index that are leading and lagging behind in making progress towards zero.

Ultimately, companies need to provide the primary solutions. The world will require them to meet their net zero goals. These reduction targets must be comprehensive, credible, and cover a company’s direct and indirect emissions, including pre-, post- and financed emissions.

Businesses must also be stimulated by market forces to set and achieve net zero obligations, including through shareholder and consumer preferences.

As during the industrial revolution, capital markets are an incredibly powerful and efficient force for accelerating progress. Accelerating the pace in order to reach net zero is what humankind desperately needs and what the capital markets can achieve in a unique way. Let’s take the opportunity.

Henry Fernandez is Chairman and CEO of MSCI, a leading provider of critical decision support tools and services for the global investment community.