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MSCI launches climate indices for investors to align with Paris Agreement

MSCI on Thursday rolled out eight new indices, designed to address climate change in a holistic way by minimising investors' exposure to both transition and physical climate risks while identifying green opportunities.

At the same time, the indices aim to align the investment strategies with the Paris Agreement target of limiting global warming to 1.5 degrees Celsius.

The Paris Agreement comes under the United Nations Framework Convention on Climate Change, and brings nations into the common cause of combating climate change and adapting to its effects.

Investors in the new MSCI Climate Paris Aligned Index Suite will be able to support the decarbonisation of the economy, the American finance firm said in a statement on Thursday.

The eight indices incorporate the recommendations of the Task Force on Climate-related Financial Disclosures, and are designed to exceed the minimum requirements for the EU Paris-Aligned Benchmark.

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They also use a variety of key climate metrics, such as climate data from MSCI's Climate Value-at-Risk tool, Scope 3 emissions data and green revenues. Scope 3 is a category of greenhouse emissions, referring to companies' indirect emissions occurring in the value chain.

Climate risks - whether physical or related to the transition to a lower-carbon economy - are changing the risk-return profile of companies and industries, said Remy Briand, head of environmental, social, and corporate governance (ESG) at MSCI.

"Extreme weather events pose new risks to companies' assets, while carbon-intensive industries are being forced to undergo transformational change," he added.

MSCI has been providing investors with low-carbon benchmarks for several years. Now, some of these investors are looking to deploy a climate strategy that goes beyond reducing carbon intensity, Mr Briand said.

The eight new indices' strategy reweights or excludes securities based on the risks and opportunities associated with the climate transition, follows a decarbonisation trajectory to align with the 1.5 degrees Celsius scenario, and seeks to minimise exclusions from the parent index.

For instance, in lowering transition risk, the indices target to reduce the weighted average carbon intensity by at least 50 per cent, underweight high carbon emitters based on Scope 1, 2 and 3 emissions and lower exposure to fossil fuels.

As for identifying green opportunities, the indices shift the weight of constituents from brown to green activities using the MSCI Low Carbon Transition score, and aim to maximise exposure to companies that provide clean-technology solutions.

Diana Tidd, head of index at MSCI, said there has been "tremendous interest" in ESG and climate indices over the past 18 months.

With growing awareness among end-investors and rising pressure from stakeholders, institutional investors increasingly want to invest to affect more systemic global change beyond the company or portfolio level, she noted. The new indices thus allow institutional investors to do just that.

The MSCI Climate Paris Aligned Index Suite adds on to the existing MSCI climate indices available for different investor needs.

Its other indices include those focused on reducing carbon footprint and those that exclude securities with proven fossil fuel reserves for energy purposes. There are also environmental indices, which include pure-play securities with significant revenue exposure to environmental solutions.

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