Investors Should Decarbonize Portfolios by 10% Annually, MSCI Says

Asset owners decarbonizing their portfolios should do so at a rate of about 10% annually to reach net-zero by 2050, says MSCI. That’s in addition to other steps institutional investors should take to curb emissions, including engaging with carbon-offending companies and implementing a climate benchmark.

Other climate research institutions have set reduction targets for investor portfolios in the past. Notably, the Intergovernmental Panel on Climate Change (IPCC), a research arm of the United Nations, has said investors should similarly target reductions of 5% to 15% annually in their asset pools.

But the 10% target from MSCI comes from its climate risk modeling team, which based its analysis on what it would take to get the companies in the MSCI All Country World Index (ACWI) Investable Market Index down to net-zero by 2050. The index covers nearly 9,000 securities globally.

MSCI announced its plan for asset owners this week in a call to action for asset owners, managers, and others. The index provider argued that all participants in the capital markets should take part in a greener economy, including a complete reallocation of capital from asset owners. MSCI itself said it would target net-zero by 2040, its latest sustainability commitment.

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“Asset owners have a critical role to play, but it’s not only for the greater good, it’s also because not taking these considerations into their investment decisions now, honestly, is at their own peril,” said Sébastien Lieblich, global head of index solutions and managing director at MSCI.

“By not taking into consideration climate change, they put their capital at risk,” Lieblich said. That ranges from failing to avoid climate-related value destruction to missing climate-related technology opportunities.

The MSCI plan came as President Joe Biden said the US would cut emissions in half by the end of the decade, as well as increase funding for less developed countries to do the same. He laid out this objective during a telecast yesterday, which was Earth Day.

Asset owners should consider risk management strategies, MSCI said, including noting stranded assets that will not make the transition to a net-zero economy. Investments prone to natural disasters such as wildfires, droughts, and flooding should also be carefully monitored.

Investors should also direct capital toward clean energy technologies, such as batteries, solar panels, and wind farms, the firm said.

Last year, the index provider released its MSCI Climate Paris Aligned Indexes that can integrate the 10% carbon emissions reduction into the MSCI ACWI.

The firm has said the indexes are based on the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and are designed to exceed the minimum requirements for climate-related disclosures in the European Union.

Among other measures, the Paris-aligned indexes exclude companies that derive more than 1% of revenue from coal mining and firms that derive 50% of revenues from thermal coal-based power generation.

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The boards of the Kentucky Public Pensions Authority (KPPA), the Kentucky Retirement Systems (KRS), and the County Employees Retirement System (CERS) are nearly all filled after appointments by Gov. Andy Beshear, the recent CERS election, and the inaugural meetings for all three systems.

The state recently split its governance into three board systems: one to oversee the two plans for state employees and state police (KRS), another to oversee the county plans (CERS), and a third board to oversee the ongoing administration and investment management of the system (KPPA).

Keith Peercy was elected chair and John Cheshire III was elected vice chair of the new nine-member KRS board, which oversees pension funds and insurance trust funds of the Kentucky Employees Retirement System (KERS) and the State Police Retirement System (SPRS).

There is still an open position on the KRS board after gubernatorial appointees David Harris and Matthew Monteiro resigned. There is only one spot open instead of two because of the restructuring of the KRS board determined by the enactment of House Bill 484, which was passed last year. The bill, along with House Bill 9, which passed during this year’s regular session of the state’s general assembly, made structural changes to the governance and administration of the Kentucky Retirement Systems, as well as established the Kentucky Public Pensions Authority.

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Beshear will appoint someone to fill the position.

The recent resignation of elected trustee Sherry Lynn Kremer created an additional vacancy, and KRS trustees are deciding how to fill out the remainder of Kremer’s term.

Changes were also made to the governance of CERS, which is now a separate nine-member board of trustees, six of whom are appointed by the governor, with the remaining three elected by CERS members.

Betty Pendergrass was elected chair of the nine-member CERS board, and Jerry Powell was elected vice chair, after they received the highest and second highest number of votes, respectively, in the February CERS election. Their current terms began on April 1 and will run until March 31, 2025.

Patricia Carver received the third highest number of votes, and was set to replace trustee David Rich on the CERS board as of Nov. 1 for a term that will also end March 31, 2025. Rich’s current term goes through October 31; however Rich resigned from the board and the remaining elected CERS trustees are considering who to name to serve the remainder of his term.

The trustees said they are leaning toward appointing Carver to the post, as she had the next-highest number of votes by the CERS membership; however the CERS board is seeking comments from its members concerning the potential appointment and is taking applications from members who want to fill the seat themselves.

KPPA has its own eight-member board made up of trustees from CERS and KRS. It includes the chairs of the CERS and KRS boards, the chairs of the CERS and KRS investment committees, and one elected and one appointed representative each from CERS and KRS.