- “Meeting the challenge of climate change will require the largest reconstruction of the global economy since the industrial revolution,” according to Henry Fernandez, MSCI’s chairman and CEO.
- Investors favored engagement over divestment as the key way to influence company behavior.
- The measurement of Scope 3 emissions along the product value chain will be critical to the achievement of net-zero.
How can investors help accelerate the net-zero transformation? This was the central question at MSCI’s recent Global Investing Conference. The two-day event, available on-demand, brought together senior corporate and investment thought leaders who argued for bold collaboration between governments, companies and investors. Here are some core takeaways.
Investors Cannot Afford to Wait
“Meeting the challenge of climate change will require the largest reconstruction of the global economy since the industrial revolution, with enormous progress needed over the next few years,” said Henry Fernandez, MSCI chairman and CEO.
“Climate change brings to our portfolios probably the single biggest underpriced risk — measured in billions, if not trillions of dollars of cost to economies, to businesses around the world,” said Anne Richards, CEO of Fidelity International.
MSCI Chairman and CEO Henry Fernandez warned: “Meeting the challenge of climate change will require the largest reconstruction of the global economy since the industrial revolution, with enormous progress needed over the next few years.”
Collaboration Is Crucial
Panelists called on corporate, government and investment leaders to go further in using their collective influence to effect real change, building on recent successes.In a poll, fewer than one in three attendees said they stress test their portfolios for climate change.
- Racing toward net-zero together: Over 3,000 companies have committed to a net-zero pathway. And 80 central banks are close to requiring climate audits and scenario-analyses on loan, insurance and investment portfolios, according to Mark Carney, UN special envoy on climate action and finance.
- Together, investors have leverage: When investors joined Engine No. 1 to elect three new dissident directors to push for cleaner energy at Exxon Mobil, it sent shockwaves through board rooms, according to Karina Litvack, nonexecutive board member of oil major Eni. “Investors are an absolutely crucial stakeholder,” she said. “Because if we are rewarded as a company for having made bold choices, we will continue to do it and feel that investors have our back.”
Only 100 companies were responsible for 71% of global industrial greenhouse-gas emissions between 1988 and 2015.
- Investors see more influence engaging than divesting: Divestment won’t solve the problem, Anne Simpson, managing investment director at CalPERS, explained. “When you walk away, those assets are still sitting there and emitting emissions even if you’ve washed your hands of the problem.” Instead, panelists urged investors to focus on improvement in harder-to-abate sectors. “The real change that we can make is by dragging those that are less committed, less convinced or less resourced in order to make the changes that are needed,” said Anne Richards.
Evaluating Net-Zero Targets
“How can we make sense of all these net-zero targets?” asked Gillian Tett of the Financial Times.
First, companies need to know where they stand on carbon emissions, explained Henry Fernandez. Only a small number of companies are comprehensive in reporting their greenhouse-gas emissions. But while the data is imperfect, the modeling tools have improved markedly, and estimates can go a long way.
Gillian Tett, chair of the editorial board and editor-at-large, U.S., of the Financial Times, interviews Henry Fernandez, chairman and CEO of MSCI, and Bill Winters, Group CEO of Standard Chartered.
“By estimating the method of production, where plants are located, the number of employees, you can get within a reasonable degree of accuracy on company emissions,” said Henry Fernandez. As for company net-zero targets, he continued, “the key is to create a credible plan and specificity behind it.” He also emphasized that not all net-zero targets are created equal.
Bill Winters, CEO of Standard Chartered Bank, went a step further. “Whether it’s the shareholders of public and private companies who are putting pressure on their companies, the providers that finance banks and capital markets or the people who are buying the goods from the companies who are emitting, the constraints are becoming ever tighter.” He continued, “The pressure on all of us as corporate leaders to fall in line with a net-zero by 2050 commitment is going to be overwhelming.”
Measuring Scope 3 Emissions Is a Commercial Imperative
“Scope 3 emissions are a measure of how successful we are in shifting our portfolio to cleaner products. Therefore, it’s a commercial imperative. We risk being irrelevant if we don’t deal with this,” explained Karina Litvack, nonexecutive board member of Eni.
A comprehensive net-zero plan must include Scope 3 emissions, many panelists maintained, while acknowledging the crudeness and complexity of the data. Scope 3 covers supply-chain emissions as well as those caused by the use of companies’ products and can represent as much as six to 10 times direct emissions.
“Scope 3 emissions are a measure of how successful we are in shifting our portfolio to cleaner products. Therefore, it’s a commercial imperative. We risk being irrelevant if we don’t deal with this,” said Karina Litvack.
Ola Källenius, chairman of the board at Daimler AG, shared how Daimler AG required suppliers have a credible decarbonization plan to be part of the Mercedes Benz supplier set and, within months, about three-quarters of suppliers signed up to match Daimler’s 2039 net-zero target.
For banks and insurance companies, Scope 3 emissions include emissions of businesses they finance and insure. Karina Litvack described how some banks can impact behavior by tying interest rates on loans to climate-transition targets. Failure to meet targets, she noted, incurs an interest rate penalty. One insurance company is influencing the market by refusing to extend insurance cover to any oil and gas company with a carbon intensity above a certain threshold.To achieve net-zero by 2050, carbon pricing needs to rise from USD 2 per metric ton currently to USD 148 per metric ton across the global economy by 2030, according to the Net-Zero Asset Owners Alliance.
Lucas Joppa, chief environmental officer at Microsoft, explained one key aspect of his company’s approach. Microsoft’s internal carbon tax is creating a powerful incentive for suppliers to reduce emissions to remain competitive. Both Microsoft and Severn Trent steer funds produced by their carbon tax (USD 15 and GBP 17 per metric ton, respectively) into innovation funds.
But, Lucas Joppa cautioned, managing Scope 3 effectively requires a granular understanding of the carbon footprint not just of sectors, but of individual companies and even products along the supply and demand chain. He called for “a paradigm shift in carbon accounting and standards.”
Consensus on Mandatory Disclosure, Carbon Pricing and Carbon Offsets
Panelists across sessions argued for mandatory disclosure requirements, global carbon pricing and a fully functioning carbon-offset market. While disclosure requirements will provide the information, panelists agreed carbon pricing will provide the incentive for the economy to decarbonize.
Bill Winters, who chairs the Task Force on Scaling Voluntary Carbon Markets, shared a roadmap for a verifiable and transparent carbon-offset market. Offsets would require proof of additionality: You only generate a carbon credit if the approach you fund would not have been viable but for the carbon credit. With new principles and stronger governance, Mark Carney estimated the market could reach USD 100 billion, with as much as 90% of that market concentrated in emerging and developing economies.
Making Net-Zero a Reality
Alvise Munari, MSCI’s global head of client coverage, closed the conference by emphasizing that investors, governments and companies all have a role to play in the road to net-zero. “By evaluating every investment through the prism of climate risks and opportunities, we can help advance the low-carbon revolution and make net-zero a reality,” he said. “Everyone has a role to play. And the challenge is, what role will you play? Where will you add value?”
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