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Climate change failure ‘working its way into investor thinking’: MSCI

Investors are beginning to consider the possibility that the worst outcomes of climate change will not be avoided, according to index and analytics provider MSCI.

MSCI said in an outlook paper that those investors already incorporating climate considerations into their portfolios were working on the underlying assumption that “some combination of technology and policy forces will limit emissions going forward, such that we can avoid the worst outcomes of climate change”.

However, the possibility that this would not happen was “working its way into investor thinking in 2019”, the company said.  

This was particularly the case for investors in less liquid assets, for whom valuations were routinely linked to longer-term timeframes.

“In 2018 a number of reports came out where the kind of [climate change] timelines we are looking at are much closer than people had thought,” said Linda-Eling Lee, global head of ESG research at MSCI.

“Within the lock-up periods of some types of private investments, many could see their projects implicated in climate-related problems and facing enhanced regulations before their payout”

MSCI

In its latest report on the impacts on global warming, the Intergovernmental Panel on Climate Change (IPCC) said it was vital to maintain the global temperature increase below 1.5°C versus higher target levels.

Emphasising the relatively near-term timeframes, MSCI singled out the IPCC’s comment that “transition challenges as well as identified trade-offs can be reduced if global emissions peak before 2030 and marked emissions reductions compared to today are already achieved by 2030”.

If not, added MSCI, by 2040, the atmosphere’s temperature will have risen by 1.5°C, inundating coastlines and intensifying drought, poverty and subsequent migration.

“Many investments take shape in a time frame that flirts dangerously with the IPCC’s projected time span before emissions need to peak and before an acceleration toward climate calamity,” said the index provider.

“Within the lock-up periods of some types of private investments, many could see their projects implicated in climate-related problems and facing enhanced regulations before their payout.”

Real estate, according to MSCI, was “a prime example of an asset class that will inevitably be impacted by climate in the next decade”. 

Some investors have already been paying attention to the so-called physical risks associated with climate change. In 2016, for example, two major French asset owners sponsored a project to develop a methodology to measure how different assets in an investment portfolio are exposed to the physical impact of climate change.

From plastic waste to scandal prevention

MSCI highlighted four other “ESG trends to watch” in its paper: the fallout from regulatory action on plastic waste; increased regulation of ESG investments; greater focus on extracting meaningful signals from ESG data; and increased investor demand for board diversity and refreshment.  

The plastic waste trade war

Plastic pollution

Credit: Adege

Plastic waste could become an issue for financial reporting and risk analysts, according to MSCI

“While all eyes remain on the trade war between the U.S. and China, another global trade war, in waste, is beginning to unfold.

“How the world addresses the disruption it creates will have ripple effects across multiple industries and countries, ripping the issue from the pages of glossy sustainability reports and thrusting it into investor presentations and financial filings as a subject of business risks and opportunities.”  

ESG regulation targets investors

“In 2019, the script flips, and it isn’t just companies that are fielding ESG-related disclosure requirements. Investors will see escalating demands as regulators ramp up scrutiny beyond primarily issuers to focus on the business of ESG investing.”  

Solving the data dilemmas

“In 2019, as we look out onto the next decade for ESG ratings, having more data will be the easy part. The hard part – and the important part – will be knowing how to identify and apply the most relevant signal and achieve better-differentiated investment objectives.” 

‘Leadership in the age of transparency’

“Investors are starting to insist that, while the parade of CEOs behaving badly may be difficult to predict and avoid, replacing them and cleaning house in the wake of a scandal should not be.

“As a result, 2019 may mark a turning point for investors tired of paying the cost for companies slow to adapt when the internal becomes external and the whole world can judge misconduct for itself.”

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