Investor engagement not enough to keep 1.5C alive, says MSCI

Sylvain Vanston calls for investors to step up as MSCI tracker reveals listed companies are set for 2.9C warming.

Sylvain Vanston, executive director of climate change investment research at MSCI, has warned that investors are not doing enough to engage with companies on climate change and that hopes of limiting global warming to 1.5C are “still alive, but barely”.

Vanston was speaking ahead of the publication of MSCI’s quarterly net-zero tracker, which monitors the implied temperature rises associated with the activities of listed companies and sectors, as well as the remaining carbon budget for 1.5C and 2C.

The update found minor improvements against both the previous and October 2021 editions of the tracker, with just 11 percent of listed companies aligned with 1.5C, up from 10 percent in October. Overall, listed companies are on track to cause global temperatures to rise by 2.9C, down 0.1C on October. While this improvement might seem small, Vanston noted that every 10th of a degree matters as it becomes increasingly difficult to reduce emissions.

“I don’t think [investors are] doing enough,” he said. “Many of our clients are doing extremely thorough work and engaging portfolio constituents and even regulators, but we also see that many investors are not investing time and effort in shareholder engagements. When three-quarters of your investors are telling you the same message, that obviously has a lot more weight than when it’s only 5 percent voting you down at your AGMs. We could do more.”

Energy remained the sector with the highest implied temperature rise, at 6.8C, followed by the automobile industry at 4.4C, and materials at 4.1C. The only three sectors to meet a 1.5C trajectory are insurance, media and entertainment, and software and services – although financed emissions are not included in the insurance calculations.

Asked what the “drastic” decarbonisation needed to meet 1.5C meant for investor returns, Vanston said that the core question – whether it was profitable to go to net zero – “is a conflict of investment horizons”.

“Right now, if you’re invested in the oil and gas sector, you’re probably doing pretty well as an investor and you’re definitely not doing very well as a climate-aligned investor, so we have those tensions,” he said. “In the long run, no issuer, no company, no economy will thrive in a collapsing world. Corporates will feel the heat – literally – and investors will suddenly get hit with the physical and transition risks borne out by their portfolios, so it’s a short-term, long-term horizon thing.”

The list of the 10 largest emitters in the report has been affected by MSCI’s decision to remove Russian entities from its indices following the invasion of Ukraine. Rosneft and Gazprom have been replaced by BHP and Chevron. Saudi Aramco remains the largest emitter, accounting for 3.4 percent of the total MSCI ACWI emissions.

At the current rate, the MSCI report warns, the world’s listed companies will have depleted the emissions budget for 1.5C in 57 months. In order to meet this goal, listed companies will have to cut emissions by 8 percent to 10 percent every year until 2050. In the two years to 2020, just 39 percent of MSCI ACWI Investable Market Index constituents achieved this goal.