‘Time is running out’: lessons from MSCI’s Net-Zero Tracker

Measuring progress is almost as critical as aiming for it when it comes to decarbonisation. In other words, to align with ambitious climate objectives, it is imperative that corporates not only report emissions but also commit to reducing them in line with the objective. As the adage goes: without a goal, you cannot score.

MSCI’s Net-Zero Tracker investigates the latest trends in corporate target-setting on a quarterly basis. Evidence from the latest edition of the tracker suggests that only 16% of listed companies have set targets that align with the elusive 1.5°C goal and 51% have targets that align with future global warming in excess of 2°C. Sylvain Vanston (SV), who coordinates the tracker, tells Net Zero Investor’s Atharva Deshmukh (AD) that companies are running out of time.

Vanston discusses why the quantity of targets varies. He suggests that while companies in upstream sectors have set targets following extensive engagement by institutional investors, not all sectors face similar expectations. Crucially, as Vanston argues, it is essential to examine the quality of targets. Not all targets are equally credible and assessing this is critical for net-zero investment decisions.

The tracker’s findings seem to contrast with the cautious optimism from the International Energy Agency’s (IEA) recently published World Energy Outlook (WEO) 2022. WEO 2022 forecasted fossil fuel emission peaks alongside positive growth expectations, for the first time since the industrial revolution. Clean energy investments, according to WEO 2022, are expected to reach $2tn by 2030. The WEO suggests that momentum seems to have accelerated. Seen in this context, the MSCI data serves as a reminder that momentum is arguably not enough and the WEO optimism should indeed be cautious.

Additionally, Vanston’s reflections on offsets and biodiversity are pertinent given the weight of the debates currently underway at COP27 in Egypt as well as those expected at COP15 Biodiversity Summit in Canada later this year.

AD The crux of the tracker is the ‘clock is ticking argument’. Why does MSCI say there are only 52 months left to align with 1.5°C?

SV It's all about carbon budgets and how much budget is left. We look at the state of emissions of listed issuers, and we know how much emissions they've put out last year. We also know how much carbon budget is left to achieve 1.5°C by 2050. That gives us only 52 months. What is worrying is that that's not a whole lot of time and it's two months earlier than we found just three months ago. So, basically, time is running out and the clock is ticking a little too fast.

AD In the context of the recent IEA discourse that finding offers an alternative perspective.

SV Yes, it does. When the IEA published its first net-zero publication last year, it was a very important piece of the net-zero narrative. It said that there is no space for new oil and gas in any net-zero scenario. That really changed a lot of the discussions in the investment industry. If the IEA has it right, it means that there is no space for greenfield oil and gas projects in your investment portfolios. The fact that the IEA has reconfirmed this quite recently in the WEO, is I think, quite an important piece of the conversation.

AD The tracker discusses a variation in self-declared corporate net-zero targets across sectors. Is this something investors should keep an eye on?

SV Some industries, such as energy or transport, have such a close connection to any transition debate that they're under more pressure not only from their shareholders, but also from civil society to produce commitments. Whereas, in comparison an industry such as media services doesn't really have that kind of pressure. However, that doesn't mean it [a net-zero target] is irrelevant.

What I find striking is that there are still very few climate targets. If you look at our biggest universe of issuers, only 46% have some kind of net-zero tracker target. So we don't have enough disclosures or targets. It's improving, but it's still nowhere near where we'd like it to be.

AD There's some debate about comprehensive and credible Scope 3 data. In your view, what is the current state of Scope 3 disclosures?

SV Scope 3 emissions are defined by the greenhouse gas protocol. That being said, for some corporates it is very tricky to identify their full Scope 3 emissions. They must rely on assumptions. It is not very easy to understand how much emissions your clients will emit, or your suppliers are emitting. However, when we combine all the reported Scope 3 emissions from corporates, we don't reach a very coherent situation, because each corporate is using a slightly different approach.

AD The tracker discusses the concept of ‘misaligned industries’ and it claims that just three out of 24 industries are aligned with the 1.5°C projected emissions pathway. What is the crux of this misalignment?

SV This is based on the implied temperature rise. Implied temperature rise type metrics take several current as well as forward-looking metrics and combine them into a proxy for climate impact measured in terms of degrees of warming. What we find is that only 16% of issuers [in the MSCI universe] are aligned [to 1.5°C] based on this method.

It is worth noting that it is extremely difficult to be aligned, at least in 2022. But what this metric shows is that you cannot be an aligned investor in a misaligned world. You can't invest in an economy that doesn't exist. So I think it's useful in terms of understanding the burden-sharing that needs to take place between policymakers, corporates and investors.

AD The tracker argues that some targets are more ‘thorough’ than others. What constitutes a ‘thorough’ target?

SV We collect roughly 32 data points for each target. Some companies have very long-term targets with no immediate goal posts. That is a problem in terms of credibility. Some have consistently missed past targets – obviously, that will not reflect very well on the credibility of new targets. We look at many different factors to assess the credibility, ambition and scope of a target. The Science-based Targets Initiative (SBTi) also has a similar approach. We also consider the SBTi assessment of a target. If you have an SBTi approval on your targets as a corporate, you've probably done your homework. We only have 41 issuers with SBTi approval.

AD In the case of carbon offsets, the tracker makes the argument that if you look at nature-based offsets and where they're located, they're located in regions with high risk of wildfires. What is the significance of this?

SV We feel that deforestation is obviously a key consideration for both biodiversity and climate objectives. Thirty-two percent of offsets are based on reforestation or deforestation avoidance. We found that a lot of those offsetting projects are taking place physically, in regions that are prone to wildfire or deforestation. It’s ironic that there are a lot of investors and corporates buying offsets that could go up in flames because of climate change.

AD What is your reading of investor expectations surrounding biodiversity?

SV This goes back to 2017/2018 when biodiversity first entered investment discussions. I don't understand biodiversity as an investor. What should I do? And why should I care? Now, people get that systemic risk is related to ecosystem failure. When you look at what scientists have been putting out for a few decades now, it's a bit awkward that many investors are surprised by the evidence. So I'm hopeful that governments as well as business leaders, and investors will truly mature this year in terms of their understanding of biodiversity-related risks and steer their investments accordingly.