What Happens in a 3°C World?

Welcome to ISSUE 3 of Sustainability Pathways.    

On May 17, MSCI’s Capital for Climate Action Conference addressed the physical risks facing the Asia-Pacific region in a 3°C warmer world.    

Physical risk modeling is a key component of MSCI’s ESG research. We use it to help asset owners identify climate exposures and build a solid platform for engagement.   

Read on for more — including highlights from the conference — to find out how asset owners can better protect their investments while contributing to a more sustainable future.

Doug

The economics of physical risk 

The physical risks of climate change are already apparent in Asia-Pacific. Researchers have warned that 90% of India is now in an extreme heat danger zone, and the outlook is bleak: carbon emissions are still rising, and the world is still warming. Of the 100 most riskiest cities facing the greatest environmental risks, 99 are in Asia.  

We mapped physical assets operated by constituents of the MSCI AC Asia IMI Index onto some of the hazards of a 3ºC temperature rise. We found that 17% of these assets would be exposed to coastal flooding, 65% to tropical cyclones, and 100% to extreme heat. 

Physical risks in Asia-Pacific: Extreme heat  

Using climate data to model extreme weather events allows investors to make informed mitigation decisions and highlight the cost of inaction to companies in their portfolio.

Asset owners will have a critical role to play in the low-carbon transition. The panel at the Asia-Pacific stream of this year’s Capital for Climate Action Conference stressed the need to manage exposure, both at a portfolio level and for individual assets and commended three steps already visible in the market:

1. switching core portfolios to sustainable indexes
2. increasing investments in mitigation and adaptation
3. collaborating with public and private sector to scale up climate finance

Listen to the full conversation

Taking action on climate:

Physical risks threaten investment returns but also offer opportunity. Watch this video to find out more.

Putting Climate Ambition into Practice - A Conversation with Ilmarinen and SGX Group

Taking an asset-owner perspective, this webinar will examine how to integrate climate considerations in portfolios and help realize net-zero economies.

Register here.

Key resources for asset owners

Consider these tools to help set and achieve net-zero targets, and support engagement with investee companies.

• ESG Framework for Asset Owners – ESG benchmarks are essential tools for asset owners to assess the resilience of their asset allocations, portfolio construction and risk management decision-making processes.
• Lower carbon exposures – The MSCI Quality ESG Low Carbon Select Indexes are designed with the aim to help maximize exposure to quality factors, reduce carbon-equivalent exposure to greenhouse gases and improve the weighted industry-adjusted ESG score of a portfolio.

Recent developments

• Carbon efficiency paying off: During the first quarter of 2023, most MSCI ACWI Climate and ACWI ESG Indexes outperformed their benchmarks.
• Best index: In May, MSCI was named “Best Index Provider” at the SRP Asia Pacific Awards 2023.
• Do investee companies give you the right information? More companies are making net-zero pledges to meet regulatory mandates, but their approaches to taxonomies and reporting still differ. To ensure information is consistent, MSCI has released Corporate Sustainability Insights, a tool to help companies report and asset owners engage with a common language. 

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