Sustainability and Climate Trends Report
MSCI released the 2024 Sustainability and Climate Trends Report, which aims to provide investors with ESG trends based on environmental, social, and corporate governance to help them evaluate and adapt to the future environment.
MSCI believes that ESG risks are closely related to financial risks, and ESG risks are still growing rapidly. 2023 will be the hottest year in history, and climate change has already caused serious impacts. Reduce these risks from a sustainable perspective has become a priority for investors. MSCI has establishes Sustainability Institute to focus on these research.
Related Post: MSCI Establishes MSCI Sustainability Institute
Impact of Extreme Weather on the Economy
Extreme weather (such as tropical cyclones, severe drought) in 2023 has already affected human life, and this trend is likely to continue in 2024. Extreme weather has increased the pressure on home insurance, and insurance costs have increased by 145% in the past 20 years, exceeding the growth rate of household income (61%). and some companies have reduced home insurance business.
In addition to damage to fixed assets, the impact of high temperatures on labor force is also difficult to ignore. Productivity losses due to high temperatures are expected to be 50% higher in 2050 than in 2020, with agriculture, construction and transportation industry being the most affected.
Development of Supply Chain Due Diligence
Supply chains can provide professional and efficient advantages, but they also face environmental and social risks. There are many players in the supply chain, and regulators are requiring companies to conduct due diligence. To protect nature and biodiversity, the European Union began to require that company’s products cannot be produced on recently recognized deforest lands.
However, the current number of traceable supply chains is still insufficient. Taking the food supply chain as an example, many of the raw materials for these products come from emerging markets and developing economies. These economies do not have extensive monitoring systems, making it difficult to carry out large-scale traces. As of September 2023, only 11% of soybeans have a traceability system, and emerging technologies such as satellite monitoring may play an important role in tracing the food supply chain in the future.
Regulation of Corporate Climate Disclosure
Regulatory agencies’ requirements for corporate climate information disclosure are increasing. Since the International Sustainability Standards Board (ISSB) launched the IFRS S2 climate information disclosure standard in June 2023, many jurisdictions have announced that their frameworks will be based on this standard. Investors can pay attention to the implementation progress of climate information disclosure policies in different regions and how the information in these different regions differs from each other.
Another issue worth noting is “orphaned emissions.” With the pressure of rising costs in the low-carbon energy transition, some companies may be inclined to slow down their decarbonization plans and therefore change the way they measure carbon emissions. For example, companies set up joint ventures or subsidiaries to split carbon emissions data. Some companies do not consider carbon emissions data from assets and business units they plan to sell in the future. While future regulatory policies may address the phenomenon of orphaned emissions, investors still need to be alert to these issues in their decision-making under current circumstances.
Investment towards Nature and Biodiversity
The topic of nature and biodiversity is becoming a focus for regulators, companies, and investors. The World Economic Forum believes that more than half of the world’s GDP depends on natural capital, and how to measure nature and biodiversity is still a problem. Unlike intuitive indicators such as carbon dioxide emissions, models and measurement methods for biodiversity vary widely.
Despite the difficulties, investment in nature-related investments is increasing. In 2023, 25% of all green bonds is related to natural projects such as biodiversity, doubling from 2018. Some developed countries are conducting debt-for-nature swaps with developing countries, providing debt discounts to developing countries in exchange for their commitment to protecting natural resources such as land and oceans. Many multilateral development banks are already involved in these deals.