MSCI has made its corporate climate forecasts less precise after criticism from investors and experts.
The data giant’s Implied Temperature Rise (ITR) methodology was launched less than a year ago, and has already been taken up by big names including BlackRock, UBS and Schroders. It uses a company’s current emissions and future decarbonisation targets to help calculate its long-term temperature trajectory. It then assesses whether that trajectory will keep the firm within its carbon budget, which is based on its revenues and sector.
MSCI has acknowledged that the calculations, which cover Scope 1, 2 and 3 emissions and seek to estimate a pathway to 2070, are based on a number of assumptions including revenue growth and future climate conditions.
Until a few weeks ago, the scores were expressed in degrees centigrade, to two decimal places. This prompted criticism due to the heavy reliance on assumptions and estimates. In a post that garnered hundreds of “likes” on LinkedIn in May, Jakob Thomä, founder of think-tank 2 Degrees Investing Initiative, asked: “Why do we think temperature outcomes can be estimated to two decimal points? In what world is this kind of precision in the indicator consistent with the incredible uncertainty of the input data, forward-looking projections and climate science?”
He added: “There is no world where this kind of precision in estimation is possible and by extension no world where this pseudo-precision is helpful.”
In response to the post, then-head of responsible investment at Scotland’s Lothian Pension Fund, David Hickey, commented: “Indeed. Absolutely ludicrous.” Hickey has since taken up a new post as head of sustainability at BlackRock’s UK arm.
Manuel Coeslier, who specialises in climate and environment at French asset manager Mirova, also waded into the discussion, saying: “Totally agree, a more acceptable and scientifically honest level of precision would be… ‘lagging, misaligned or aligned’.”
Responsible Investor has now learned that, just a few weeks after the discussion, MSCI changed the temperature scores to one decimal place.
“In late June 2022, the Implied Temperature Rise model outputs in degrees Celsius were rounded up at one decimal point,” confirmed a spokesperson for MSCI. When asked if this was in response to the recent backlash, RI was simply told the decision “reflects the degree of accuracy, given assumptions embedded in the model”.
Responding to the news, 2Dii’s Thomä said MSCI had made “a step in the right direction towards more honesty about what ITRs can deliver”.
But Adam Matthews, chief responsible investment officer at the Church of England Pensions Board and another vocal critic of the scores, told RI: “We remain unconvinced they are helpful or of sufficient quality to be of use. We understand why certain fund managers see a benefit [to using ITRs] in terms of products, but from an asset owners’ perspective I am still yet to find an advocate”.
MSCI’s ITRs are available, and free to access, here.