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Corporate GHG reductions must be accelerated: MSCI

12 July 2021 IHS Markit Energy Expert

The world's publicly listed companies must dramatically accelerate GHG emissions reductions if the 1.5-degrees Celsius global warming target set out in the Paris Agreement is to be met, warned global index provider MSCI.

Without a dramatic turnaround in emissions trajectory, public companies will exceed their share of the world's "carbon budget" for meeting the Paris Agreement in less than six years, it said as it released its new quarterly update, MSCI Net-Zero Tracker.

The tracker covers 9,300 companies on the MSCI All Country World Investable Market Index (MSCI ACWI IMI), accounting for 99% of listed equities.

"The MSCI Net-Zero Tracker is a progress report for whether the world can keep the global temperature rise below 1.5 degrees C," MSCI CEO Henry Fernandez said in a news release. "Listed companies and other capital market participants have less than six years to meet that target."

This information could put added pressure on the world's largest companies to curb their emissions. With the next global climate meeting, COP26, coming in Scotland in November, nations have been announcing commitments to greater reductions in emissions by 2030 on their way to goals of net-zero emissions by 2050 (see here and here). But companies have usually been looked at as individual entities, rather than as a whole, though entire industries have mandatory and voluntary emissions-reduction programs.

The MSCI tracker puts it together at the corporate level. Companies in the MSCI ACWI IMI emitted an estimated 10.9 gigatons of direct GHGs (Scope 1) in 2019, it said. To limit warming to 1.5 degrees Celsius by 2050, they would need to collectively cap future direct emissions at 61.4 gigatons of CO2-equivalent. Without any change, the companies would deplete their remaining emissions budget in five years and eight months.

To limit warming to 2 degrees Celsius by 2050, listed companies would need to collectively cap future direct emissions at 233 gigatons of CO2-e. This budget would be exceeded in 21 years and five months if emissions are not curbed.

Starts with disclosure

The MSCI Net-Zero Tracker identified companies with improved climate disclosures as well as those that lag.

"The data in our inaugural Net-Zero Tracker shows the need for a dramatic acceleration in action from the world's public companies," said Remy Briand, global head of ESG and climate at MSCI. "For those not matching their commitments or lagging, there should be nowhere left to hide."

State-owned Coal India, the world's largest coal producer, led the list of 10 laggards that have not disclosed their emissions. Russian oil company Surgutneftegas, American refiner PBF Energy, and seven Chinese entities, including Shaanxi Coal and Chemical Industry Group and China State Construction Engineering Corporation, are also on the list.

Among companies that expanded their disclosures in the most recent quarter are consumer products giant Procter & Gamble and Dutch semiconductor company ASML Holding. Both now report all emissions across Scopes 1, 2, and 3.

European aircraft maker Airbus, Chinese technology company Baidu, and British American Tobacco are among corporate leaders reporting their direct and indirect emissions over the last 12 months, though MSCI said that "not all of the disclosures are comprehensive." Energy firm Equinor did as well, reporting nearly 273 million mt of CO2-e for its last reporting year, which MSCI said represented 98% of its estimate of Equinor's emissions.

In a different report in June, MSCI said that more than 1,000 large and mid-cap stocks across 23 developed and 27 emerging markets have set a decarbonization or net-zero target to achieve between 2021 and 2100.

On an industrywide basis, MSCI said that the energy industry is, by far, on the trajectory to overshoot its emissions budget most severely. The median emissions level reported by companies in its energy sector category is more than 600% above its budget for the easier 2-degrees Celsius budget. The utility sector is 200% over its budget, followed closely by the materials sector. On the other end of the scale, the financial, communications, and healthcare industries are below their emissions budgets.

Corporate targets and action

Other programs, such as the Science-Based Targets Initiative (SBTi), also seek to improve and rank corporate climate disclosures and to spur action. SBTi was launched in October 2020 by four nongovernmental organizations in order to present—and verify—a methodology for financial institutions to validate science-based corporate climate commitments.

As Institutional Shareholder Services (ISS) observed at the time of SBTi's release "in the current climate, the corporate world is increasingly held responsible for its impacts on the environment, illustrated by the emergence of greenhouse gas regulations in many countries. There is therefore a growing expectation that companies have strategies in place to reduce these impacts. Target-setting is an important aspect of such strategies."

As of today, SBTi reports that more than 1,600 companies have submitted their climate plans to SBTi for review, and it has verified more than 800 of them.

In reviewing SBTi, IHS Markit Vice President, Energy Transition & Cleantech Nick Lowes and Executive Director, Strategic Governance Advisory and ESG Integration Christine Chow called it "transparent and relatively detailed guidance on the methodologies to define Paris Alignment," but noted that further refinement is taking place to clear up inconsistencies and improve analysis as new climate forecasts are available.

With climate commitments becoming more common and more complete in the corporate world, MSCI has developed a "scorecard" that enables comparisons between companies that have expressed their commitments according to different criteria and on different timelines. MSCI's scorecard looks at the comprehensiveness of a published target (Does it contain Scopes 1, 2, and 3?); the ambition (How much and how quickly will emissions be reduced?); and the feasibility (Has the company made progress in prior years?).

"The journey to a net-zero future will be powered by markets as investors allocate capital towards greener business models and away from fossil fuel-based industries," said Linda-Eling Lee, global head of ESG research, when the scorecard was launched last month. "Investors need a robust approach for assessing and comparing the real-world impact of a company's commitments and the likelihood of achieving them."

Reporting by Abdul Latheef, OPIS; and Kevin Adler, Net-Zero Business Daily.

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