- Owners and managers of assets, financial institutions and companies are committing to climate action amid a rapidly changing economic landscape.
- MSCI’s Capital for Climate Action Conference brought together leaders in climate finance to untangle the latest challenges in the net-zero transition.
- The themes from the conference were: the value of data; the increasing number of opportunities; the need for investment in developing markets; and the need for action.
Helping capital-market participants better understand climate risks and opportunities is essential to making net-zero a reality.
That was among the key themes at MSCI’s Capital for Climate Action Conference, which brought together leaders from a diverse mix of global organizations who are driving the low-carbon transition. Discussion centered on the fundamental role of investors, financial institutions and companies in that central challenge and how they are navigating the complexity that accompanies it. Here are the takeaways from the gathering that stood out for us:
The value of data
“The goal is to connect the financial economy with the physical economy,” said Henry Fernandez, MSCI’s Chairman and CEO, who stressed the need for climate data, tools and collaboration across industries.
- “Data is absolutely key,” said Catherine McKenna, Canada’s former minister of environment and climate change, who chaired the U.N. High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities. “What’s your baseline, are your emissions going down, is your money going to clean at scale — these are things that actually matter and are very measurable.”
- Sunita Subramoniam, APAC head of ETF and index investments for sustainability at BlackRock Inc., stressed the value of data in helping asset-owner investors transition their portfolios over time. “It’s not just about setting up these solutions but about really figuring out how to monitor their progress against the commitments that have already been made,” she said.
- “I think we are still in very early stages of climate risk being fully priced into financial instruments,” observed Roy Choudhury, managing director and senior partner at Boston Consulting Group Inc. (BCG), pointing to the value of structured data that comes with mandatory disclosure.
The panel for the “Toward Sustainable Growth: Where Are We in the Energy Transition” session
Clockwise from upper right: Monica Oviedo Céspedes, head of sustainability management, Iberdrola Group; Spencer Dale, chief economist, BP; Laura Cozzi, chief energy modeler, International Energy Agency; Vijnan Batchu, managing director, Center For Carbon Transition, J.P. Morgan; and Chris Cote, Americas ESG & climate research lead, MSCI Research
Opportunities have multiplied
Investors are more able than ever to turn the risks of the shift to a net-zero economy into opportunities, thanks to the growing cost-competitiveness of transition technologies, both MSCI’s latest research and discussion at the conference affirm.
- “We are witnessing what we see as sprouts of the new global clean-energy economy,” said Laura Cozzi, chief energy modeler at the International Energy Agency (IEA), citing growth in renewables, electric vehicles and heat pumps. At the same time, investment in “infrastructure for electrification, especially grids,” and carbon capture and storage still lags, she added.
- Vijnan Batchu, managing director with J.P. Morgan’s Center for Carbon Transition, echoed the point, noting that while it’s early days for removal, capture and sequestration of carbon, the U.S. Inflation Reduction Act and long-term offtake agreements are providing tailwinds for investment in those technologies.
- Industries that are hard to decarbonize present opportunity, observed Laura Segafredo, BlackRock’s global head of sustainable research for ETF and index investments, citing research showing that “most of the investments that are needed to decarbonize the economy are actually in sectors that are currently high carbon.”
- The Bank of America is seeing “a tremendous amount of capital demand for mature decarbonization technologies,” noted Karen Fang, the bank’s global head of sustainable finance. Fang said that she and her colleagues also see growing momentum in emerging technologies such as green hydrogen, carbon capture and sequestration and biofuels, spurred in part by the Inflation Reduction Act, which is making those technologies more affordable.
- “There are opportunities everywhere,” noted BlackRock’s Subramoniam “We're seeing huge amounts of clean-energy capacity coming on in countries like Japan, India and China.”
- Any enduring energy transition will need to take account of decarbonization, as well as the security and affordability of energy, in the wake of the Russia-Ukraine war, stressed Spencer Dale, BP p.l.c.’s chief economist.
- Energy security increasingly includes access to critical minerals such as lithium, said both the IEA’s Cozzi and BlackRock’s Subramonium, who noted that such minerals make transition technologies feasible. “We believe that in the long run these transition-linked assets are going to outperform,” she said.
Decarbonizing the global economy will demand investment in developing markets
“The adequacy and predictability of climate finance in emerging markets and developing countries is crucial to achieving the Paris Agreement goals,” stressed Razan Al Mubarak, U.N. Climate Change High Level Champion for COP28 and president of the International Union for the Conservation of Nature, a reality echoed throughout the discussions.
- “A major fault line for the fight against climate change is the amount of investment in clean energy going into the emerging world,” said the IEA’s Cozzi, who noted that financing in those countries is becoming more difficult. “The cost of capital is a huge barrier.”
- BP’s Dale agreed. “The vast majority of the growth we need to see in low-carbon energy is in emerging markets in the developing world,” he noted. “The problem that we face, just like many other developers face, is that financial markets in these countries are far less deep.”
- The relative youthfulness of coal-fired power plants across Asia compounds the financial challenge of phasing them out, said Yuki Yasui, managing director for The Glasgow Financial Alliance for Net Zero (GFANZ’s) Asia Pacific Network, who noted that the age of such plants averages about 11 years in Southeast Asia, 13 years in China and 20 years in Japan and Korea.
- BCG’s Choudhury noted that what he termed “a huge portion” of the roughly USD 5 trillion in annual investment in decarbonization needed globally will be needed in the Asia-Pacific region. “We also see a mismatch between the capital that is needed for new and emerging technologies and the risk profile of the capital that’s available,” he added. “This is where we see the role for catalytic capital and blended finance to be quite important.”
- Erik Berglof, chief economist at the Asian Infrastructure Investment Bank (AIIB), cited the region’s reliance on fossil fuels and what he termed governments’ “overexposure” to them. “There is absolutely no reason why state-owned enterprises or state-owned financial institutions could not be part of the renewables revolution,” he added.
- It was noted that investments will be required in real assets as well. Three-quarters “of the buildings standing today are not likely to meet the reduction target of 45% by 2030 to align with a 1.5-degree pathway,” said David Fogarty, CBRE Singapore’s head of ESG consulting services. David Sivaprasad, BCG’s Southeast Asia lead for climate and sustainability, warned that “even in a 1.5-degree scenario, we face severe physical impact.”
The importance of action
Credible net-zero commitments are “comprehensive, authentic, consistent and transparent,” observed Roger Urwin, global head of investment content at Willis Towers Watson Public Limited Company and an MSCI advisory director.
- McKenna enumerated what she termed “the price of admission” for net-zero pledges by the private sector: Science-based targets, reductions in emissions across the value chain, capital spending aligned with the goal of net-zero, executive compensation tied to climate targets, a halt to investment in new fossil-fuel infrastructure, avoidance of cheap credits, and a willingness to lobby governments for positive climate action.
- Monica Oviedo Céspedes, Iberdola Group’s head of sustainability management, urged investors to “focus on companies that are betting on the transition by including it in their financial indicators,” as Iberdola has.
- “Hold us to account in terms of the scale and ambition of our aims, as well as for the transparency of those aims and plans,” Dale suggested, noting that BP aims to reduce production of oil and gas 25% from 2019 levels by 2030 and that the company’s investment in transition technologies rose to 30% last year from 3% in 2019, and is slated to climb 50% by 2030.
- Net-zero transition plans for financial institutions developed by GFANZ are “very much an action plan to align the organization’s business activities with a pathway to net-zero greenhouse gas emissions,” Yasui stressed. “The main objective is to deliver real-economy emissions reductions in line with achieving global net-zero.”
Further Reading
Capital for Climate Action Conference: Replay
The Climate Transition Is Increasingly About Opportunity
A Framework for Attributing Changes in Portfolio Carbon Footprint