MSCI, one of the largest index providers and ESG raters, will strip hundreds of companies of their ESG ratings and downgrade thousands under upcoming standards, according to a report seen by the FT. MSCI’s ESG ratings have been the source of controversy in the past year- with many accusing the company of giving high ratings to companies causing environmental harm.
Regulators in several countries have criticised index providers for greenwashing companies with their ratings, which they argue falsely give many environmental bad actors a “green” seal of approval.
Under these new policies, the number of companies with a triple-A ESG rating will plummet from 1,120 to just 54, a significant shift that makes its highest rating a much more exclusive group.
The annual Economic Report of the President (ERP) was released this week, containing a chapter on climate risk that in effect, calls for a paradigm shift in federal policy in relation to climate change. The report argues that federal intervention has created ‘moral hazard’ in numerous ways, incentivising Americans to engage in behaviours that will become increasingly risky as the climate warms.
As a prime example, the authors point to America’s vast array of crop subsidies and wide ranging insurance, which evidence has shown creates a disincentive for farmers to adapt to extreme heat or drought.
Within the last two years, the Federal government has repeatedly stepped in to ensure homes can be insured against climate disasters. Most recently, a record number of Floridians turned to state backed insurance after Hurricane Ian devastated the area and led many to speculate that private insurance would withdraw from the area entirely.
The Hollywood Reporter has revealed that many large TV and film companies are using unconventional means to attract the large amount of investment attached to ESG.
As a relatively low-polluting industry that contributes only 0.1% of global industrial emissions, there are limited methods for these companies to showcase their green credentials. In Paramount’s 2022 ESG report, they stated that climate change was a discreetly material issue for their company, citing the fact that they were not a major emitter of GhGs.
In response, many of these companies have elected to attract sustainable investments by increasing the visibility of green technologies in their content. For example Netflix has committed to feature electric vehicles in all their in-house productions and several other networks have produced sustainability-conscious programming, such as a net-zero football game on Sky.
As ESG and sustainable finance grows in prominence, many companies will seek to implement increasingly innovative initiatives to attract the capital and investment attached to it, regardless of their emissions profile.
In the wake of the recently published IPCC report that once again stressed the importance of limiting global warming, climate scientists and global policymakers are coming to grips with the magnitude of the challenge that lays ahead of them.
According to data released by the IPCC, the world will need to make “rapid, deep and in most cases, immediate” reductions in their greenhouse gas emissions, all of which would represent comprehensive changes to much of the way the economy operates. To reach 1.5C, global emissions would need to peak by 2025 and be reduced by almost 60% in 2035.
This report is but one in a series of urgent warnings by international bodies that highlight the need for intervention by policymakers and investors. Sustainable finance has a clear role in driving the development of green technologies and holding businesses accountable to their climate pledges.