Climate change could lower the value of corporate bonds and cause credit spreads to widen to more than twice their historically narrow levels, according to an analysis by MSCI that examines two temperature-rise scenarios.
Banks and other financial institutions play a pivotal role in supplying companies and entrepreneurs with capital they need to create and scale clean energy. Banks’ own stakeholders are assessing the alignment of their bank and its business with key temperature targets.
The COP26 climate conference affirmed the need to act “in this critical decade” to prevent the worst effects of climate change. Nearly 200 countries pledged to revisit and strengthen their climate commitments. Their pact recognizes the need for scaling up private investment to reach net-zero.
The first week of the COP26 conference in Glasgow produced promises by world leaders to slash methane emissions, end deforestation and speed the development of clean technologies. A number of countries also strengthened pledges to reach net-zero. Here are some of the takeaways.
The world is likely to be between 2.6°C and 2.8°C warmer by the end of this century if countries continue putting greenhouse gases into the atmosphere at the rate mapped out in their current plans.
Companies could see their borrowing costs rise in proportion to their climate transition risk if policymakers were to establish a strict timetable for reaching net-zero emissions with the goal of limiting global warming to 1.5°C, according to MSCI’s model-based analysis.
As COP26 approaches, governments across the world are revisiting their nationally determined contributions, which set out country decarbonization targets. This interactive map developed by MSCI ESG Research shows which countries are strengthening pledges to reduce emissions between now and 2030.
While the world has a 50% chance of keeping global warming to 2°C, preventing the worst extremes of climate change would require advanced economies to relinquish the use of coal by 2035, the latest PRI-sponsored policy scenario finds.
Investors are assessing the resilience of companies to climate risk and the transition to a net-zero world, and are focusing their shareholder engagement accordingly. The goal: to influence companies to consider the risks and opportunities of climate change.
The world is running out of time to reach net-zero. At their current rate of emissions, the world’s publicly listed companies are on track to burn through their remaining share of the global emissions budget for keeping temperature rise to 1.5°C by 2026.
Investors can play a critical role in the transition to net-zero by allocating capital to companies with achievable net-zero targets, by excluding those with poor records on emissions and by using engagement to influence companies’ long-term strategies.
Net-zero does not mean zeroing out emissions of carbon and other greenhouse gases. Some sectors of the economy such as transportation or cement production may continue to rely on fossil fuels even if much of the rest of the economy has phased them out.
Though no one can know with certainty, a variety of estimates suggest some of the value at stake. But net-zero is becoming increasingly important for investors, both in terms of minimizing potential risk and also maximizing potential opportunities.
The TCFD recommends that organizations identify, assess and manage climate-related risks and opportunities within the context of an organizationwide risk management framework. That includes looking at risk from varying time horizons, such as the short, medium and long terms.
Investors break down the carbon footprints of portfolio companies by emissions type. For most investors, the bulk of greenhouse gas emissions come from portfolio companies, especially from across companies’ value chains.
Decarbonization targets reflect a company’s commitment to reduce its emissions of greenhouse gases. If the target is net-zero, it means the company aims to first decrease its emissions and then offset the remaining emissions with carbon removal.
The target date of many corporate climate targets is nearly 30 years away. Owners and managers of assets, companies and other capital-markets participants are mapping out interim targets for cutting carbon emissions across portfolios.
The financial risks associated with climate change could come from a transition to a net-zero economy or from extreme weather caused by global temperature rise. Investors want to know that companies are considering such risks as part of their long-term strategies.
The Paris Agreement rests on a determination by each signatory country regarding the action it will take to address climate change. Nationally determined contributions (NDCs), which set out countries’ climate targets, measures and policies, form the basis for global action.
Here are terms that will help investors as they take steps to decarbonize their portfolios. Some of the terms come from climate science and others from investing. Together they form a lexicon for bringing sustainable investment to scale.
Climate change and the loss in biodiversity are interrelated. Both threaten nature, human health and well-being, and result from human activity. Both present risks for the financial sector. Action to prevent biodiversity loss also may help to achieve global climate goals, and vice versa.
The Task Force on Climate-related Financial Disclosures (TCFD) provides a framework for reporting in line with global temperature goals. With its mix of objective, subjective and forward-looking metrics, the TCFD is designed to be suitable for all companies that raise capital.