World temperatures will rise 3 C if listed companies do nothing to change their existing projected emissions, new research suggests, underlining the difficulty of trying to invest sustainably in passive-based ETFs.
The October 2021 release of the quarterly MSCI Net Zero Tracker, which examines the progress of more than 9,000 of the world s most invested companies towards reducing carbon emissions, reveals the companies contribution to global warming.
The study found a majority of these companies, which are constituents of MSCI - All Country World Investible Market Index, did not align with any global temperature target. This chart found that fewer than 10 per cent of the Paris Agreement were signed in 2015 to try and keep global warming above preindustrial levels.
While MSCI found energy, materials and utilities sectors accounted for the bulk of global corporate emissions, the study reported that there were high emitters in every sector.
The research highlights companies with very bad practices, however granular detail obscures a wider concern, according to Patrick Wood Uribe, chief executive of Util, which examines the positive and negative impacts of about 45,000 global companies on the 17 UN Sustainable Development Goals.
As an assessment of the constituents of the ACWI IMI, he said, the report draws viable conclusions, but added that indices such as this one informed the asset allocation decisions of thousands of investors and the direction of trillions of assets under management which collectively amplify and are exposed to their aggregated emission-target failures.
Exchange traded funds now have more than $9 tn of assets under management, the vast majority of which is invested passively.
Rumi Mahmood, senior associate in ESG research at MSCI, said the objective of Net Zero Tracker was not to name and shame.
A lot of companies and industries that do not currently meet targets are at the heart of the carbon transition and the report aims to create transparency and provide a gauge for collective progress of listed firms towards the climate goals, Mahmood said.
He pointed out that many of the largest ETF providers were also to be active in terms of engagement and that they were able to put pressure on the companies owned by the ETFs to improve their carbon footprints.
Morningstar analyst Krista Lamont agreed with Kenneth Lamont. The passive behemoths huge and consistent presence in global equity markets mean they are well-positioned to lead in the area of active ownership and able to engage and pressure for change at some of the worst climate offenders, he said.
The inability of broadest market trackers to divest can be seen as a drawback, but even the unscreened market trackers can be tools for change, said he added.
Urgency and pragmatism need to go hand in-hand, Mahmood said, adding that quantitative investment strategies that track indices underscored the need for improved, passive climate related disclosures.
Uribe Wood agreed that there was more need for granular impact data, referring to Util's recent case study. He said that of 281 sustainable funds - 77 of which were branded with the terms climate clean or green - just four had a positive environmental impact that aligned with all five international UN Sustainable Development Goals.