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Climate 101: Aligning your Portfolio with a Net-Zero Economy
Explore how owners and managers of capital can be a force in confronting the single biggest challenge of our time
What’s at stake
What’s at Stake?
Henry Quote
Capital markets are an essential and critical force to drive the transition to net-zero with concerted action from all participants, ranging from a reallocation of capital by asset owners, to effective channeling of funds by asset managers and banks to greener investments and innovation, alongside the commitment of companies1.
Henry Fernandez, Chairman and Chief Executive Officer, MSCI
What’s at stake paras
Climate change is an existential threat to our planet and the single greatest challenge facing humankind. Its consequences are now being felt. The warming of Earth’s atmosphere caused by human-generated emissions of carbon dioxide and other greenhouse gases is fueling extreme natural disasters, causing sea levels to rise and endangering human health, biodiversity and property.
Averting a climate catastrophe will require the largest reconstruction of the global economy since the Industrial Revolution.2 Decarbonizing the economy may create new markets for clean energy and sustainable products, and demand tremendous advances in technology. Capital markets participants, including asset owners, companies, and asset managers all will likely be part of the solution. They are coming together, setting climate targets and taking action.
Featured Content
Featured Content
<a href="https://www.msci.com/our-solutions/esg-investing/history-of-climate-change-science" ><h3>A Brief History of Climate Change Science</h3></a>
How did we get here? Travel the scientific trail of climate change with Dr. Oliver Marchand, MSCI’s global head of ESG research and development.
<a href="https://www.msci.com/our-solutions/climate-investing/real-estate-climate-solutions" ><h3>Real Estate Climate Solutions </h3></a>
Advisers with the knowledge and tools to understand the nuances of ESG and Climate investing and position client portfolios accordingly can deliver additional value to clients and strengthen relationships.
<a href="https://www.netzeroserviceproviders.com/" ><h3>MSCI Joins the Net Zero Financial Service Providers Alliance</h3></a>
MSCI is proud to be a founding member of the Net Zero Financial Service Providers Alliance and is committed to aligning all relevant services and products with the goal of net zero emissions by 2050 or sooner.
Capital in the Net-Zero Economy Intro
Capital in the Net-Zero Economy
Owners and managers of capital must play a primary role in achieving a net-zero economy (that is, one that balances greenhouse-gas emissions with an equivalent amount of carbon removal) by the middle of this century. Trillions of dollars in new investment will be needed to change from carbon to clean energy3. Investors can contribute by decarbonizing their portfolios, allocating capital to low-carbon technologies and products, and using their stewardship to encourage companies to set and meet emissions targets. MSCI has identified a series of steps that capital-market participants can take to achieve a net-zero economy. We’ve also detailed our own commitment to achieve net-zero emissions before 2040.
Risks and opportunities
Risks and Opportunities
Climate-related disasters threaten crops, real estate, health and society. At the same time, the transition to net-zero is creating new markets for clean energy and sustainable products and services.
Demand for clean-energy companies also has impacted investment performance. Alternative energy and clean-technology companies performed in line with the MSCI ACWI IMI while oil and gas and other carbon-intensive companies underperformed the index over six-and-a-half years that ended in May 2020, according to an analysis by MSCI4. In the last 20 months of the study, the so-called green companies outperformed the MSCI ACWI IMI while the carbon-intensive companies still underperformed it.
In numbers
In Numbers
Financial Risks from Climate Change
Financial Risks from Climate Change
$825.4 billion
The cost of weather and climate disasters in the U.S. that resulted in damage of at least $1 billion each over the decade that ended in 2020.5
$900 billion
Or roughly one-third of the value of big oil and gas companies that estimates suggest would disappear if governments move to restrict the rise in global temperatures to 1.5° C above pre-industrial levels for the rest of this century.6
Two to three
The number of notches the sovereign credit rating of an oil-exporting nation could fall by 2050 absent steps to diversify its economy, according to Fitch Ratings.7
Financial Opportunities from Climate Change
Financial Opportunities from Climate Change
Financial opportunities from climate change
7.9%
The amount by which a hypothetical index of clean-energy stocks outperformed a hypothetical index of carbon-intensive stocks between September 2018 and May 2020.8
90%
The share of global energy generation that is projected to come from renewable sources by 2050 according to a pathway to net-zero put forward by the International Energy Agency.9
$1.5 trillion
The value of new revenue opportunities from low-carbon goods and services, according to European companies in their 2019 disclosures to CDP.10
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Further Resources
Further Reading
<a href="https://www.msci.com/our-solutions/esg-investing/principles-of-sustainable-investing" ><h3>Integrating Sustainability into the Investment Process</h3></a>
Given the growing impact that climate change, social attitudes, institutional governance and technological innovation may have on capital markets in the coming decades, MSCI believes that sustainability should be integrated throughout the entire investment process.
<a href="https://www.msci.com/www/blog-posts/is-there-a-green-to-brown/02053435998" ><h3>Has the Path to Net-Zero shown up in Performance?</h3></a>
How have companies whose businesses support the transition to a low-carbon economy performed compared with carbon-intensive companies?
<a href="https://www.msci.com/our-solutions/esg-investing/foundations-of-climate-investing" ><h3>Foundations of Climate Investing</h3></a>
Aligning your Investment Strategy
Aligning your Investment Strategy
Investors are aligning their investment strategies with the goal of reaching net-zero emissions by the middle of this century. The push to net-zero reflects the marked transformation that climate change is expected to exert on the allocation of capital in the years and decades to come11.
In fact, net-zero targets may toughen in the run-up to the 26th session of the Conference of the Parties to the U.N. Framework Convention on Climate Change Conference (COP26), slated to take place in Glasgow this November.
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Reaching net-zero emissions likely will require investors to integrate climate considerations into their investment processes. That may include measuring and reporting on exposure to climate risk, developing low-carbon investment strategies, factoring climate change into risk management, engaging portfolio companies, and benchmarking performance.
Climate and performance
Climate and Performance
The shift to a net-zero economy may lead to both winners and losers. The transition is creating new markets and paving the way for products and services that enable societies to grow sustainably. At the same time, companies not aligned with a net-zero goal may see their access to capital shrink and demand for their products fade.
Companies’ earnings growth and stock performance were directly related to their greenhouse gas emissions, according to research by MSCI that examined companies in the MSCI ACWI IMI over a period of seven-and-a-half years that ended in January 2021. Stocks of companies at the lowest risk in the transition to a net-zero economy outperformed the stocks of companies in their sector that were less aligned with the transition during the study period.
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Owners and managers of assets may seek to move to investment policy benchmarks that provide a reference point for the path to net-zero. Climate indexes can help investors identify both stranded assets and green opportunities. Such indexes also may be used as the basis of climate-focused investment products.
Want to get in touch to find out more
Want to get in touch to find out more?
Contact our ESG Client Service team to learn more about our climate solutions or to discuss your own climate objectives.
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Climate 101 Related Content
Related Content
Climate Transition and Bonds: Risk or Opportunity?
Series of hypothetical investment-grade bond portfolios versus benchmarks by reweighting bonds to reduce exposure to the energy and utilities sectors while adding exposure to companies that may benefit from new technologies for removing carbon from the air.
Read BlogStress Testing Climate-Change Scenarios
How companies in the MSCI Europe Index could be impacted by both transition and physical risks and opportunities of climate change.
Read the BlogManaging Climate Risk in Investment Portfolios: A Case Study
How MSCI’s Climate Value-at-Risk model can be used to measure climate risks for a global actively managed fund and to explore which sectors, countries and securities drove risks in the portfolio.
Download PDFFoundations of Climate Investing
To what extent has climate risk been priced into equity markets? Is there a discount for fossil-fuel-based companies and a premium for ones that use green technology?
Read ReportPutting your portfolio on a Paris-aligned pathway?
Learn how institutional investors use equity and fixed income indexes from MSCI as tools for constructing Paris-aligned portfolios, as well as how indexes can help investors achieve their climate objectives.
Download PDFClimate Reality Bites: Actually, We Will Not Always Have Paris
Sluggish Action Impedes Investors from Aligning with a Two-Degree World.
Explore MoreClimate101 footnotes
1MSCI, MSCI Calls on Capital to Lead the Net-Zero Revolution
2MSCI, The Role of Capital in the Net Zero Revolution
3Morgan Stanley Decarbonization: The Race to Zero Emissions
4MSCI, Is There a Green-to-Fossil-Fuel Premium?
5NOAA, Billion-Dollar Weather and Climate Disasters: Overview
6Financial Times, Lex in depth: the $900bn cost of ‘stranded energy assets
7Fitch Ratings, Stranded Assets a Long-Term Risk for Major Fossil Fuel Exporters
8MSCI, Is There a Green-to-Fossil-Fuel Premium?
9Fitch Ratings, Stranded Assets a Long-Term Risk for Major Fossil Fuel Exporters
10iea, Net Zero by 2050
11Oliver Wyman, DOUBLING DOWN Europe's low-carbon investment opportunity