The prospect of a shrinking equity universe

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The number of companies aligned with a world that limits temperature rise to 1.5°C could shrink as the reductions needed to reach net-zero emissions grow steeper with each passing year. That could leave investors struggling to find companies to invest in.

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Companies are short of the mark

The number of companies aligned with a 1.5°C world could become increasingly limited as the reductions needed to reach net-zero emissions grow steeper with each passing year, according to MSCI.

Ninety percent of the world’s publicly listed companies were not on track to reduce their emissions for keeping global warming to 1.5°C, as of Sept. 8, 2021.

To keep warming at 1.5°C, every publicly listed company would need to reduce its carbon intensity by an average of 10% every year until 2050.

Historically fewer than one in four companies have managed to reduce their emissions by that much.

There is a limit to how much investors can shift their capital if 90% of companies run “too hot,” meaning that their emissions trajectories would take us to a world beyond a 1.5 rise in temperature.

Societal action required
No action. Business as usual scenario.
Portfolio construction challenge
Option 1: 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
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
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.

Source: MSCI ESG Research, as of Nov.30, 2020

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Honey I Shrunk the Equity Universe. An interactive exhibit that shows how different climate scenarios might impact equity investment opportunities.