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Net-Zero Basics

How investors can drive the transition to net-zero

clock 5 minute read

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.

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The role of capital markets in accelerating the transition

Reaching net-zero will require a transformation in the relationship between humans and how we produce and consume energy. Decarbonizing the global economy in a matter of decades will require the reallocation of capital on a scale that rivals the Industrial Revolution. That transition took roughly 80 years. The planet needs to reach net-zero in one quarter of that time. Trillions of dollars will be needed for transformative innovations and advances in technology that can allow society to grow sustainably.

  • Owners of capital can determine which companies in their portfolios have net-zero targets, assess those companies’ greenhouse gas emissions for deviations from those targets and map those deviations to an implied temperature for each portfolio. Asset owners also can draw on their influence as shareholders to encourage company management and directors to align their businesses with a low-carbon economy.
  • Asset managers can build expertise to fund clean energy, develop risk management and reporting expertise in line with the Task Force on Climate-related Financial Disclosures (TCFD), and use their shareholder voting power to encourage companies to align with net-zero targets. Managers also can increase the availability of investment options aligned with a net-zero trajectory.
  • Banks and broker dealers can support entrepreneurs and innovators with capital needed to invent and scale clean energy. Banks also can develop mechanisms such as carbon markets to help providers of capital manage risks.
  • Companies can make net-zero a central part of their business strategies, and set emissions-reduction targets that keep them well under the allotted net-zero budgets for their sector. That includes articulating a credible path and specific plans on how they will achieve their reduction, together with timely and detailed updates on their progress.

Henry Fernandez, MSCI’s chairman and CEO, talked with FCLTGlobal’s “Going Long” podcast to discuss the power of data in driving the transition to net-zero, the role of companies in meeting climate targets and why investors may have less time to act than they think.

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