Below are some of the biggest takeaways from the discussion, which was hosted by Meggin Thwing Eastman, MSCI’s global ESG editorial director. You can watch a recording of the discussion here.

Turning to execution

  • For investors who have pledged to align their portfolios with net-zero emissions, 2022 is “going to be about implementation, implementation, implementation and accountability,” said Sagarika Chatterjee, director of climate change at the Principles for Responsible Investment. Asset owners and managers, banks, insurers and others who have made the commitment will need to set and publish a near-term net-zero target, either for 2025 or 2030.
  • Roger Urwin, global head of investment content at Willis Towers Watson and an adviser to MSCI, said that investors should prepare to squeeze about 10 years of work into a year or two. They’ll need a variety of metrics, together with “very strong governance to get the right sort of decisions.” Investors are also likely to witness what Urwin termed “a paradigm shift in the investment model,” in which they’ll need to consider real-world impact alongside traditional considerations of risk and return.
  • “Clearly, you’ve got to take account of nations representing 90% of global GDP committing to net-zero targets, where there’s even risk in knowing how they’re going to implement that,” said James Cameron, senior adviser to Pollination Global and a “Friend of COP” adviser to the U.K. Government. Investors also will be taking account of decarbonization commitments in each sector, how much they have at risk if they still own fossil-fuel stocks “and how you’re going to engage with those companies on their transition.” Commitments by governments, cities and at least six car companies to phase out combustion engines in new vehicles, as well as commitments to protect biodiversity add to the considerations, said Cameron. “How asset owners rethink their asset-allocation techniques to cope with these new signals will increase in importance,” he added.
  • Cameron cited, for example, a conversation in Glasgow with BlackRock CEO Larry Fink about the firm’s climate commitments. “How’s their money going to move in a different direction? What different algorithms are they going to use with their passive funds?” asked Cameron, who also anticipated that investors will increasingly need to account for the price of carbon in their assessments of risk.
  • Though it’s relatively easy to decarbonize portfolios by slightly overinvesting in lower-carbon sectors and underinvesting in higher-carbon sectors, or by investing within sectors by investing in companies with a lower-carbon footprint, “that metric alone really doesn’t tell us much,” said Will Martindale, group of head sustainability at investment adviser Cardano. “It’s about the trajectory. It’s about the transition. It’s about the changes the company is undertaking.”
  • As announced at COP26, the International Sustainability Standards Board will be developing climate and sustainability disclosure standards that align with recommendations of the Task Force on Climate-related Financial Disclosures, noted Sam Prestidge, adviser on strategy and policy at the IFRS Foundation, who noted that the process would benefit from investors’ input. “I really do implore you take part in that process as early as possible,” said Partridge, who added the ISSB aims to publish an initial draft as soon as March and put a final standard in place by the end of the year.

The future for fossil fuels

  • Investors will need to reassess assets and liabilities in fossil-fuel companies based on a carbon price, said Cameron, who noted the much higher price for carbon the Bank of England has used in its own scenario analysis as well as commitments by many countries (including China) to stop funding coal plants overseas. “You put that all together and it’s not an attractive prospect to own fossil-fuel stocks over the 10 or 20 years, even with demand at its current heights,” he said, adding that engagement with fossil-fuel companies may entail having “a serious conversation about whether these institutions need to separate their high-carbon assets from their low-carbon assets.”
  • “I think the main lever really has to be climate-policy advocacy,” added Urwin. “We cannot get away from the fact that we are going to need to see unabated coal power decommissioned in most of our advanced economies, including China, by 2035.”

Broadening engagement

  • “I think we’re starting to see engagement be a more comprehensive process, where we’re starting to link equity engagement, fixed-income engagement, sovereign-bond engagement and policy engagement,” said Chatterjee, who credits the UK Stewardship Code developed by the Financial Reporting Council for catalyzing effective practices. “I think fixed income is particularly important because it’s at the point of the supply of new capital. And obviously we’ve seen a massive growth in green bonds.”
  • The investor-led Climate Action 100+ initiative offers a good example of how investors can broaden collaborative engagement on emerging topics like biodiversity as well as for “real economy-policy engagement,” said Martindale, including “the signals that we send to policymakers on the need for clear, sectoral decarbonization pathways in high-carbon sectors like buildings, vehicles, utilities and so forth.”
  • The word “holistic” will be a big one for 2022, predicted Urwin, who notes that investors will need multi-asset-class solutions. “Credit and fixed-income portfolios, I think are really interestingly positioned, where engagement needs to step up. You’ve got to have some differentiation of cost of capital between sustainable and unstainable models,” he said.

Blended finance

  • Eastman noted that a blend of public and private capital can also spur investment to address climate change in countries and areas that either lack market infrastructure needed by many institutional investors or may be considered too risky.
  • “This is where we need to see some real innovation and closer collaboration,” said Chatterjee, who pointed to a discussion paper on scaling blended finance published recently by the Net Zero Asset Owner Alliance. One example is the need to enhance the universe of blended-finance projects; another is to improve incentives for development-finance institutions, she noted, adding that “we’re very much looking forward to any further input we can get and also for asset owners to work very closely with managers on what some of the solutions could be in this area, so that we can really fulfill the potential.”
  • “A holistic picture demands that we take more seriously the imbalances that come from emerging markets and developing economies,” agreed Urwin, who called blended finance “a very natural step in the right direction.”
  • “How to get the cost of capital down for the energy transition in emerging economies” will be a central question, said Cameron, as will “how to get the cost of capital down to properly value natural systems in those very places where there are significant natural capital resources that are undervalued by definition. How do we get capital to move to those jurisdictions, in our own mutual interest, not out of aid, but as an investment? That challenge is immense, but it hasn’t been risen to adequately yet.”

Continue reading

Just Transition: Finding the Nexus of Need and Investability, a look by MSCI ESG Research at the need for climate investment outside of developed economies, for society to achieve global temperature goals.

Scaling Blended Finance, a discussion paper published by the UN-convened Net Zero Asset Owner Alliance (November 2021).

Key elements of the 2021 Biennial Exploratory Scenario: Financial risks from climate change, Bank of England (June 2021)

The UK Stewardship Code 2020, voluntary principles that call on signatories to steward investments with the aim of creating long-term benefits for clients and sustainable benefits for the economy, environment and society.

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