MSCI Launches Climate Indexes as Demand Breaks New Records

Index provider MSCI has launched a range of new benchmarks designed to help investors align their portfolios with the goals of the 2015 Paris Agreement on climate change.

The eight indexes are designed to reduce exposure to the risks associated with the transition to a low-carbon economy and the physical effects of climate change, while also accessing opportunities in renewable energy and other “green opportunities”.

The Paris Agreement saw world leaders pledge to take action keep the global average temperature rise to below 1.5°C above pre-industrial levels.

While US president Donald Trump has withdrawn the US from the agreement, private companies, asset managers, and investors have all increasingly sought to address issues related to climate change through greater allocations to environmental, social and governance (ESG) investment strategies.

Global assets invested in ESG-themed exchange-traded funds broke through the $100 billion mark in July, according to data from ETFGI, on the back of investors seeking to allocate to a ‘green recovery’ from the COVID-19-induced market crash.

A recent report from PwC forecasted that more than half of mutual fund assets in Europe could be in ESG-focused funds by 2025 as part of an “imminent paradigm shift” in responsible investing.

Last year, Morningstar reported that US fund flows into sustainable strategies exceeded $20 billion, nearly four times more than in 2018, bringing total sustainable investment assets in the US to nearly $140 billion.

MSCI’s new indexes include climate data from the company’s Climate Value-at-Risk tool, which forecasts the effects of climate change on company valuations. The benchmarks also incorporate so-called ‘scope 3’ emissions data, which relates to the indirect emissions from companies doing business.

The indexes are also aligned with the Task Force on Climate-related Financial Disclosures recommendations and are designed to exceed minimum standards set by the European Union’s Paris Agreement-aligned benchmark designation, MSCI said.

“Climate risks, whether physical or related to the transition to a lower carbon economy, are changing the risk-return profile of companies and industries,” said Remy Briand, head of ESG at MSCI.

“Extreme weather events pose new risks to companies’ assets, while carbon-intensive industries are being forced to undergo transformational change… Investors are looking to deploy a climate strategy that goes beyond reducing carbon intensity.”