MSCI report identifies new risk landscape for investors
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MSCI report identifies new risk landscape for investors
Although ESG is not a new concept, it is rapidly becoming the new normal in the investment world and is topping the agendas of many corporations. Environmental, social and governance considerations have become increasingly important as they are being evaluated by investors and the public as a crucial part of company analysis alongside conventional financial metrics.
While many ESG factors, such as climate change, biodiversity, and regulation have become well-established, long-term trends, 2022 has been a year of turmoil, with a war in Europe, rising geopolitical tensions, an energy crisis, soaring inflation, a sharp turn in central banks’ policies, climate-induced disasters and more. Many of these events will have long-lasting impacts on the world and the global economy, giving rise to new ESG risks, as well as opportunities.
Climate change remains a key concern
The most important large-scale trend shaping the ESG-investing world is undoubtedly climate change, including decarbonization of sectors and economies, as well as investors’ and companies’ attempts to chart a course to net-zero.
“It is not surprising that many on our research team touch on climate change across a variety of angles: from carbon credit funds to insured emissions, and from scrutiny of net-zero targets to decarbonising industrial real estate,” says Meggin Thwing Eastman, Managing Director and Global ESG Editorial Director at MSCI.
For example, a risk that has been examined in the report is: while more and more companies are publishing climate and carbon emissions reduction targets, how practical are their strategies in reality?
“In 2023, we’ll be watching which companies up their climate target game in the face of what we expect to be increasing pressure from institutional investors who have their own portfolio net-zero targets to meet,” she elaborates.
According to MSCI, of the 9,238 constituents in the MSCI ACWI Investable Market Index as of October 2022, 36 per cent (3,306) gave set climate targets. Of these, 715 companies have set targets aligned with the Paris Agreement and approved by the Science-Based Targets initiative (SBTi), while just 45 have set net-zero emissions targets for 2050 or earlier under the SBTi corporate net-zero standard, one of the most rigorous net-zero standards across industries.
“With the focus on corporate climate targets likely to intensify and regulations around disclosure likely to tighten, investors should be able to make better informed climate-investing decisions going forward,” Eastman adds.
Enhanced regulatory requirements
This focus on credible climate targets is also a key concern for global regulators, which have been introducing a string of new rules and regulations to try to stem the rise of greenwashing by both companies and the fund management industry.
Regulatory measures are set to strengthen for other climate change considerations, including the introduction of deforestation-free market-access rules by the European Union, potentially mandatory requirements to report on Principle Adverse Impact indicators, such as greenhouse gas (GHG) emissions and toxic waste, as well as requirements for financial institutions to conduct climate stress tests.
A key question may be: will global and regional banks be ready for these climate stress test regulations?
“In our report, we looked into this risk and we’ll be watching which banks can rise to the challenge of developing climate-risk data and modelling capacities to meet the demands of regulatory climate stress tests,” Eastman says.
With 2022 policymaker debates as a backdrop, investors will continue to evaluate how the climate crisis will impact their portfolios in 2023. Yet, there may be hiccups on the path to decarbonisation.
She explained, “The ongoing war in Ukraine and record levels of inflation globally may limit near-term pressure to reduce global GHG emissions as governments prioritise energy security and affordability. However, MSCI ESG data reveals that major power companies are keeping their eyes on longer-term decarbonisation trends and expanding deployment of renewables. It is something that we will continue to monitor going forward.”
7 key themes covered
To summarise, key themes covered in the 2023 list of ESG and climate investing trends include:
- Innovations in the supply chain, including how tracking goods through blockchain technology and the mining of e-waste could reshape the dynamics of controversial raw material sourcing;
- Changing governance, with exploration of how new corporate board demographics could play a role in say-on-climate and other proxy voting trends;
- Responses to regulation, including tangible impacts of new rules on asset managers, institutional investors, and corporations;
- Work life changes, such as the proliferation of railroad strikes and labour rights movements globally;
- New frontiers in measurement and transparency, with insurers and banks set to expand scope of emissions tracking;
- Emergence of new investments, ranging from lab-grown commodities to carbon as an asset class;
- And turning points for ESG assets, including green bonds and nuclear energy.
“There is a lot going on around the world. And it is shaping both the investment environment and the challenges and opportunities facing companies. Our annual ESG & Climate Trends to Watch report examines how significant geopolitical and macro risks will transform the ways in which investors evaluate the impact that companies in their portfolios have on society and their bottom line. ESG risk is financial risk, and the ESG and climate research showcased in the report was conducted to support investor needs to synthesise previously unseen risks and incentivise companies to better manage both emerging issues and the longstanding, expansive threat of the climate crisis,” Eastman concludes.