The Case Against Climate Pessimism

Amid record U.S. oil production, a slowdown in electric-vehicle sales, a political backlash against net-zero policies, and a series of global crises, many people fear that progress on climate change has stalled.

While the reality is more encouraging, climate pessimism could become self-fulfilling unless governments and industries recapture a sense of momentum.

The good news is that low-carbon energy continues to reach historic milestones.

Last year, global renewable-power capacity expanded by nearly 50%, with the United States, China, Europe and Brazil all setting new annual growth records, according to the International Energy Agency (IEA).

In fact, China added as much solar-photovoltaic capacity in 2023 as the whole world did in 2022.

Meanwhile, the IEA reports that energy-related carbon emissions in advanced economies fell to their lowest level in half a century.

This exerted downward pressure on total global emissions, which over the past decade have grown at their slowest pace since the Great Depression.

Of course, none of that means we have solved the climate problem.

Total global emissions continue to hit new record highs.

And listed companies are still on pace to warm the planet 3 degrees Celsius above pre-industrial levels by 2100, according to the latest MSCI Net-Zero Tracker.

For perspective, scientists believe 1.5 degrees of warming is the limit we must achieve to avoid the worst climate impacts.

Yet listed companies are now projected to consume their share of the 1.5-degree carbon budget by July 2026.

In short: While the low-carbon transition has accelerated, we still have a long way to go — and we have to get there much faster.

As the COP28 summit affirmed, governments must create a policy framework that incentivizes decarbonization.

However, the transition is not primarily about government policy. It is about the evolution of climate-related risks and opportunities in global markets.

A recent survey led by Stanford University and the MSCI Sustainability Institute found that the overwhelming majority of investors already consider climate or carbon emissions in their investment decisions.

At the same time, only 4% of investors believe climate risks are mostly reflected in current asset prices.

This gets to an important challenge facing investment-tools providers like MSCI: We must deliver data and solutions that illustrate the full spectrum of climate risks and opportunities across asset classes and geographies.

After all, reaching net-zero emissions will require the largest reallocation of capital and repricing of assets in history.

Any such global economic transformation must be powered by the investment and financial industries.

Amid the tremendous market volatility of the past few years, venture-capital and private-equity (VC/PE) funding for climate-technology investments has held up relatively well.

For example, while VC/PE funding for climate-tech firms declined by 12% in 2023, the decline of VC/PE funding for all startups economywide was nearly three times larger (35%), according to BloombergNEF and Pitchbook.

In other words, despite the drop from 2022 levels, climate-tech funding significantly outperformed the broader market.

Likewise, while the number of climate-tech venture and growth investment deals fell by 3%, it was “still double the levels seen in 2020,” according to Sightline Climate.

Last year, Boston Consulting Group and the Rockefeller Foundation surveyed more than 100 climate-finance leaders representing a wide range of investor types and asset classes. Their findings capture both the persistent challenges and enormous potential of net-zero investing.

On the negative side, the survey showed that climate investors are concerned about market headwinds, such as rising interest rates and overall economic uncertainty. It also highlighted stubborn obstacles to project development, including foreign-exchange risk in emerging economies and policy complexity everywhere.

On the positive side, “Investors from across the public and private sectors believe climate finance opportunities exist across every major theme and market. They believe those opportunities cut across regions. And, notably, despite market fluctuations, they believe the investment pipeline is growing.”

To help investors navigate that pipeline, MSCI provides a diverse array of climate datasets, models, indexes and other solutions.

For example, our climate indexes measure the performance of listed companies that are making progress on one or more key climate goals, such as reducing emissions, managing transition risks, generating green revenue, or aligning with global net-zero targets.

In 2023, both the MSCI ACWI Climate Action Index and the MSCI ACWI Climate Change Index outperformed their parent index, the MSCI ACWI Index, by margins of 2.7% and 6.5%, respectively, according to MSCI research.

The biggest gaps in climate investing remain data and pricing, which are closely connected: As high-quality data become more widely available, asset prices can better reflect long-term risks and opportunities. This in turn can promote the capital reallocation that is essential to building a net-zero economy.

Over the next few weeks, MSCI will bring together leading experts to examine these topics in greater detail, as part of our third annual Capital for Climate Action Conference. Held in London and Singapore, our event will explore how to maximize the role of investment and finance in driving decarbonization.

Looking ahead, we cannot know how government climate policies will evolve, or whether world leaders will follow up on the promises they announced at COP28.

But we do know that capital markets are essential to making those promises a reality.