Aligning Portfolios with the Paris Agreement Msci
We dispel five common ESG myths to help investors build more sustainable portfolios. A guide to aligning investment portfolios with global temperature targets. The MSCI Climate Paris Aligned Indices are designed to help investors implement net-zero strategies in their portfolios. The indices aim to take a holistic approach to climate change in order to minimise their exposure to physical and transition risks related to climate change and increase their commitment to sustainable investment opportunities. The indices are based on a temperature increase scenario of 1.5°C and include the recommendations of the Working Group on Climate-related Financial Disclosures (TCFD) as well as the minimum requirements for the EU-aligned benchmark in Paris. The pressure on institutional investors to fight climate change and demonstrate its influence on their decision-making and portfolio construction continues to grow. There is a growing focus on aligning clients` investment strategies with the decarbonisation pathways needed to achieve the 1.5°C global increase targeted in the Paris Agreement. To reflect this change, we introduced the MSCI Climate Paris Aligned Index, which aligns with this holistic view of the risks and opportunities of climate change. The index aligns with TCFD recommendations, significantly reduces the index`s CO2 footprint (including Scope 3 product and supply chain emissions), increases the weight of companies with strong reduction targets, and reduces physical exposure to climate risk (based on the MSCI Climate Value-at-Risk (Climate VaR) model). Finally, the index will reduce its carbon footprint by 10% year-on-year („self-decarbonization“). 4 As investors adapt their climate-conscious investment strategies to the physical, social and economic challenges of climate change, a holistic approach that integrates forward-looking measures of climate risk and climate return can be useful in their journey to decarbonise their portfolios. The MSCI Climate Paris Aligned Index is a complementary instrument for institutional investors as a benchmark and basis for indexed allocations. Climate change is one of the main topics that investors would like to include in their portfolio.
As investors strive to build portfolios and measure performance, these sustainable indices can serve as a critical reference point. The MSCI Climate Paris Aligned Indexes, available for equity and bond portfolios, are a transparent way to implement a green investment strategy. The key element is to determine whether a company is aligned with a warming of 1.5 degrees compared to pre-industrial levels. To do this, data on companies` climate goals, emissions data, and estimates of current and future green incomes are collected. Then, the indices include companies with a 10% decarbonization rate from one year to the next to promote temperature adjustment. It is essential to identify investments that meet the overall objectives set in each category in order to make a positive allocation to the best emitters in their category and to establish minimum climate standards for those that lag behind the adaptive capacity needed to benefit from or support the transition. To achieve this result, emitters must be evaluated using various measures and identified how they interact. These range from carbon intensity, both absolute and peer-to-peer, to measures of climate value at risk and future reduction targets, to measures on the opportunities for increasing climate change. Financing a net-zero future with carbon streaming together, these four considerations support a net-zero emissions strategy where all emissions produced are in balance with those from the atmosphere. What does portfolio alignment mean if there is a plan to decarbonise an investment strategy over time? The MSCI Global Warming Potential aims to answer these questions by measuring how a particular portfolio (or company) contributes to a projected increase in global temperature above the pre-industrial average using the company`s climate goals, Zone 1, 2 and 3 emissions, and estimates of current and future green incomes as inputs for climate trajectories. Understanding the calculated warming potential of a large and diversified portfolio is not easy, as relatively few companies have sufficiently ambitious and credible targets and, therefore, only a few are currently focusing on 1.5°C (based on the MSCI Global Warming Potential framework). In order to achieve alignment through investments, portfolio climate key performance indicators (KPIs) must also be monitored and reported.
This must include not only better use of existing metrics, but also the development of new tools and analytics. These key dimensions illustrate the extent to which investment decisions are focused on climate change mitigation and adaptation needed to support the Paris Goals: climate-related risks, whether physical or related to a transition to a low-carbon economy, are changing the risk-return profile of certain companies and entire sectors, Leading to new and increased risks in investors` portfolios.1 Institutional investors are rising from the pressure to align their strategies towards a maximum global temperature increase of 1.5°C, as desired by the Paris Agreement, raises questions about how this can be done taking into account other investment constraints. Pension funds are at the forefront of the demand for such strategies. Portfolios may seek to mitigate both physical and transition risks associated with climate change and incorporate specific climate-related objectives in line with investor requirements, such as. B the Working Group on Climate-Related Financial Disclosures, without compromising risk and return characteristics at portfolio level. Aligning capital flows with ambitious climate goals requires a shift in portfolio allocation. This means extending the traditional focus on risk and return with additional climate-focused targets. There are three main pillars of principles that investors and their managers can follow to align portfolios with the Paris Agreement and a 1.5°C investment strategy. These include portfolio allocation, issuer selection and climate KPI monitoring. The MSCI Climate Paris Aligned Indices are designed to help investors implement net-zero strategies in their portfolios. The top-down investment approach, which aims to take advantage of transformative trends such as disruptive technologies and help investors proactively understand and manage the impact of themes on portfolios. How can you respond to this information to implement a green investment strategy? This chart from MSCI is Part 2 of the series and explains how investors can align their investment portfolios with the Paris Agreement.
The authors would like to thank Oliver Marchand and Phanos Hadjikyriakou for their support of the global warming potential model and the calculated scenarios. When investors build a portfolio, they usually choose to align their portfolio with benchmarks. For example, investors looking to build a portfolio of global equities could align with the MSCI All Country World Index. 3Pressure on issuers has also increased, for example, through the EU Regulation on disclosure of sustainable finance or proposed changes to accounting standards. See „Ifrs Foundation Trustees consult on global approach to sustainability reporting and on possible Foundation role“ IFRS Foundation press release, 30 September 2020. We are committed to aligning all relevant services and products with the goal of net-zero emissions by 2050 or earlier. Climate change is creating new risks and opportunities for investors. How can you align your portfolio with the goals of the Paris Agreement? Enable investors to analyse and report on the risks of their portfolios in relation to the risks related to the transition and the physical climate. Decarbonisation can be supported by a positive allocation to leading companies in the carbon industry that are already in line with the Paris targets, but also by a positive allocation to companies in transition. .