Henry Fernandez is chairman and CEO of MSCI. The opinions expressed in this commentary are his own.
If the world hopes to limit the increase in global temperatures to 1.5 degrees Celsius — the level scientists say is necessary to avoid the worst impacts of climate change — total greenhouse gas emissions must peak before 2025 and decline 43% by 2030, according to the United Nations Intergovernmental Panel on Climate Change.
Governments alone cannot hit those targets. Private businesses will need to reallocate capital for low-carbon investments and find ways to make large-scale emission reductions possible.
Unfortunately, while countless companies tout their green credentials, their carbon footprint and emissions trajectory often tell a different story. As of May 31, only 11% of the 9,000-plus companies in the MSCI All Country World Investable Market Index were aligned with a 1.5-degree pathway, according to the MSCI Net-Zero Tracker, which monitors carbon emissions and other climate metrics among listed companies.
To achieve faster progress, governments should adopt policies that would drive decarbonization throughout the global economy. Here are four ideas that could help move the world closer to net-zero emissions.
Mandate climate-related financial disclosures for companies
When it comes to reporting climate-related financial data, companies can choose from multiple voluntary disclosure standards that non-profit organizations formulate. However, these disclosure requirements vary significantly based on the methodology and framework that each organization uses, making the data inconsistent and incomparable.
Mandating that publicly listed companies disclose certain information — including their core emissions, biggest facilities and top suppliers — would help establish uniform, baseline standards, and thereby help investors better understand climate risks and opportunities. This information would enable investors to decarbonize their portfolios and invest in more sustainable assets and businesses instead.
The mandates should be industry-specific, too, because different sectors of the economy face different types of climate challenges. For example, it would not make sense to impose the same disclosure requirements on oil and gas, health care, restaurant and technology companies. All requirements should elicit the most meaningful, materially relevant data from each industry.
If we equipped investors with this information, it would be easier for them to separate climate leaders from laggards, measure the likely effectiveness of different investments and determine which companies are positioned to thrive during the low-carbon transition.
Expand and improve global carbon markets
Carbon “offsets” create a financial incentive to reduce emissions or remove carbon from the atmosphere, because the reduction or removal can be sold as a credit and used to counterbalance other emissions. This encourages investment in low-carbon activities, including green technology and energy efficiency.
The combined value of global carbon markets — where offsets are traded — currently stands at around $270 billion, according to MSCI research. That number will surely grow thanks to the breakthrough agreement signed by nearly 200 nations at the COP26 climate summit in Glasgow last fall, which tightened and clarified the rules for these markets.
To build on the progress made at COP26, policymakers should introduce better verification mechanisms for offset projects to ensure they deliver real emission reductions without double-counting, which remains a challenge.
In a broader sense, governments need to promote greater transparency and consistency in carbon markets, while figuring out the best way to integrate offsets with their national climate policies.
Put a price on carbon
In most parts of the world, carbon emitters do not have to compensate society for the full cost of their pollution. A well-designed, economy-wide carbon price would help fix that by making emissions more expensive. This would bring down the relative cost of low-carbon energy and products, which would boost the appeal of renewables and clean technology.
By realigning incentives across industries, a carbon price could help fuel a virtuous cycle of green investments and lower emissions.
I realize that in the current high-inflation environment, carbon pricing is probably a political nonstarter. But if we take the longer view, it would speed up the capital reallocation and asset repricing that are critical to reaching net-zero.
Help developing economies navigate the low-carbon transition
Even with a rapid expansion of carbon trading and pricing, many developing countries would still need additional transition support from advanced countries.
The International Energy Agency has projected that clean energy investments in developing economies would have to increase by more than sevenfold by the end of this decade — to more than $1 trillion per year — to keep the world on track for net-zero by 2050.
One solution is to expand the use of blended-finance arrangements, in which governments provide concessional or below-market loans to make clean energy projects more attractive for private-sector investors.
Scaling up blended climate finance would demand close collaboration between public and private institutions, including multilateral financial institutions. It all starts with identifying the climate-related projects where government assistance (a) is most needed and (b) can have the biggest impact.
In many ways, the story of climate change is a story of underestimation. For decades, markets and policymakers underestimated how fast global temperatures would rise and extreme weather events would increase. On the positive side, they also underestimated how fast renewable energy would grow.
Today, many people have become pessimistic about the world’s ability to reach net-zero. But this might be another case of underestimation.
When governments feel united by a sense of urgency and mission, historic changes can happen quickly. Let us hope our leaders summon the unity and purpose required to address the climate crisis.
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