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ESG trends 1 intro copy

Five years ago in Paris, the world agreed to limit global warming to 2˚C. Investors got on board, but the easy part is over. A few exclusions and a portfolio tilt can get you only so far. In 2021, investors committed to aligning with the Paris Agreement face a steeper climb ahead: persuading companies to make radical changes or face a rapidly shrinking universe of qualifying investments.

Honey, I Shrunk the Equity Universe

See How Different Climate Scenarios Might Impact Equity Investment Opportunities

Barring a dramatic policy and technological breakthrough, the availability of Paris-aligned investment opportunities will become increasingly limited with each passing year as the required emission reductions to reach zero emissions grow ever steeper. The interactive exhibit below shows the actions required, and the resulting portfolio construction challenges, to limit global warming at various temperature levels. Use the slider on the thermometer to see the implications at each temperature.


Interactive Assets

4.0°
Societal Action Required
No action. Business as usual scenario.
Portfolio Construction Challenge
Option 1: Decarbonize
Decarbonize
Investors can engage portfolio companies or otherwise push them to reduce their future carbon emissions. This chart projects the annual carbon reduction required of each portfolio company between 2020 and 2030 to align to a given temperature goal. It is possible that the rate of annual carbon reduction would need to intensify after 2030, depending on the scenario.
Option 2: Rebalance
Rebalance
Investors can shift their portfolio's weight away from heavy emitters toward lower emitters or companies developing low carbon technologies. This may result in more concentrated portfolios as those low emitting companies would represent a substantially greater share of the total portfolio. This chart projects the approximate proportion of the investible universe that would remain by 2030 if portfolios were rebalanced to achieve a given temperature goal.
Option 3: Divest/Invest
Divest/Invest
Investors can divest from non-aligned companies and divert this capital to investments in climate change mitigation or adaptation initiatives, directly contributing to solutions. The investible pool of such solutions in listed equity markets is still small, so these investments would likely need to be channeled toward other asset classes. This chart projects the current market value of listed companies aligned to a given temperature scenario based on their carbon emissions and publicly announced carbon pledges.
Invest
Divest

ESG trends 1 chart footnotes

This calculation is based on a hypothetical portfolio comprising companies of the MSCI ACWI Investable Markets Index (IMI), representing over 8,300 large-, mid- and small-cap companies with available climate-change data across developed and emerging markets, as of Nov. 30, 2020. The data for the warming pathways is provided by Climate Action Tracker’s Global Emissions Time Series dataset. Source: Climate Analytics, NewClimate Institute, MSCI ESG Research.


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ESG Trends 1 Related Cards

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1 See for example: “The Bank of England’s climate-change related financial disclosure 2020.” Bank of England, 2020.; “GPIF Publishes the "Analysis of Climate Change-Related Risks and Opportunities in the GPIF Portfolio." Government Pension Investment Fund of Japan, Oct. 2, 2020; “Addressing Climate Change Risk, CalPERS’ First Response to Senate Bill 964.” California Public Employees Retirement Fund, December 2019.