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Fewer than 10% of companies surveyed were aligned with Paris Agreement goals to limit global temperature increase to 1.5C © Getty Images

World temperatures will rise 3C if listed companies do nothing to change their current projected emissions, new research suggests, underlining the difficulty of trying to invest sustainably in broad-based passively managed ETFs.

The October 2021 release of the quarterly MSCI Net-Zero Tracker, which examines the progress of more than 9,000 of the world’s most investable companies towards reducing carbon emissions, reveals the companies’ contribution to global warming.

The study found a majority (57 per cent) of those companies, which are constituents of the MSCI All Country World Investable Market Index, did not align with any globally agreed temperature target. Worse still, it found that fewer than 10 per cent were aligned with the Paris Agreement signed in 2015 to try to keep global warming to 1.5C above pre-industrial levels.

While MSCI found energy, materials and utilities sectors accounted for the bulk of global corporate emissions, the study noted that there were high emitters in every sector.

The research highlights companies with best and worst practices, however the granular detail obscures a wider concern, according to Patrick Wood Uribe, chief executive of Util, which examines the positive and negative impacts of about 45,000 global companies on the 17 UN Sustainable Development Goals.

“As an assessment of the constituents of the ACWI IMI, the report draws viable conclusions,” he said, but added that indices including this one informed the asset allocation decisions of thousands of investors and the direction of trillions of assets under management, which collectively amplify and are exposed to their aggregated emission-target failures.

Exchange traded funds now have more than $9tn in assets under management, the vast majority of which is invested passively.

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Rumi Mahmood, senior associate in ESG Research at MSCI, said the objective of the net zero tracker was not to name and shame.

“A lot of the companies and industries that currently do not meet targets are at the heart of the carbon transition and the report aims to improve transparency and provide a gauge for the collective progress of listed companies towards climate goals,” Mahmood said.

He pointed out that many of the largest ETF providers were also the most active in terms of engagement and that they were able to put pressure on the companies owned by the ETFs to improve their carbon footprints.

Kenneth Lamont, senior fund analyst at Morningstar, agreed. “The passive behemoths’ huge and consistent presence in global equity markets mean they are well-placed to lead in the area of active ownership and able to engage and pressure for change at some of the worst climate offenders,” he said.

“The inability of unscreened market trackers to divest can be seen as a drawback, but even the broadest market trackers can be tools for change,” he added.

“Urgency and pragmatism need to go hand in hand,” Mahmood said, adding that passive investment strategies that track indices underscored the need for improved, quantitative climate-related disclosures.

Wood Uribe agreed that there was more need for granular impact data, referring to Util’s recent case study. He said that of 281 sustainable funds — 77 of which were branded with the terms “climate”, “clean” or “green” — just four had a positive environmental impact that aligned with all five environmental UN Sustainable Development Goals.

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