Dispelling Popular Misconceptions about the Climate Problem

I have often said that climate change represents the single greatest challenge humankind has ever faced. Meeting that challenge will require the largest reconstruction of the global economy since the Industrial Revolution.

The stakes could not be higher — so it is important that we dispel popular misconceptions about the climate problem.

For example, many people seem to think:

• that we have 30 years to solve the problem; ?
• that the energy industry should carry almost the entire burden; and
• that fossil-fuel divestment alone is a winning strategy.

Each of these beliefs is fundamentally misguided.

Let us start with the idea that we have until 2050 to solve the problem.

I understand why people think that. After all, governments, companies, and other institutions have set 2050 emissions targets and net-zero goals.

But make no mistake: Keeping global temperature rise below 1.5 or 2 degrees Celsius this century will require enormous progress over the next half-decade.

In fact, the United Nations Intergovernmental Panel on Climate Change has projected that we are now likely to hit 1.5 degrees of warming by 2040.

Not by the end of the century. Within the next 19 years.

For that matter, MSCI has estimated that, as of March, the 9,000-plus companies in our All Country World Investable Market Index had a combined warming potential of 3.5 degrees.

If companies continue delaying the necessary emissions reductions, the challenge will only get harder — and the problem will only get worse.

Of course, many people will say, “Energy companies caused the problem, so they should have to solve it.”

The reality is more complicated.

Large-scale climate solutions have three pillars. Energy is certainly one of them. But the others — capital and technology — are equally important.

To achieve net-zero emissions, all three pillars — energy, capital, and technology — must work together.

Technological innovation can drive the growth of low-carbon energy. But innovation requires capital. More specifically, it requires a reallocation of capital and a repricing of assets.

In other words, we cannot expect the energy industry to singlehandedly solve the climate problem. It is a collective problem that demands collective solutions.

Remember, five sectors of the economy must decarbonize — energy and power, transportation, production, real estate, and food and agriculture.

Unfortunately, many remain stuck on pursuing only fossil-fuel divestment.

I recently discussed this topic with my friend Chris Ailman, chief investment officer of the California State Teachers Retirement System (CalSTRS) pension fund. Chris strongly supports climate action, but he strongly opposes divestment.

In our conversation, he offered a useful analogy.

Suppose you are a parent with young kids, and you feel unhappy with your local school board. What can you do? Well, you can start attending board meetings. You can make your voice heard. You can put together a coalition of people advocating for change.

If you do all those things, the board will probably listen to you.

That is one option.

Another option is to sell your house and move to another town. But if you do that, the school board has no reason to address your concerns. Someone else will move into your old house. And it might be someone who supports what the board is doing.

A similar dynamic applies to oil and gas companies.

Investors, especially large institutional investors, have real leverage.

For example, in December of 2020, CalSTRS announced that it would support an alternate slate of board members for ExxonMobil — a slate put forward by a climate activist firm called Engine No. 1.

This past spring, three of the Engine No. 1 candidates captured seats on the 12-person Exxon board — a milestone achievement for climate investors.

The only reason it happened is that large institutional shareholders used their leverage. If they had simply divested all their Exxon shares, that leverage would have disappeared.

This gets to a broader point.

Meeting the climate challenge is not about separating “good companies” from “bad companies.” It is about encouraging, incentivizing, and helping all companies to decarbonize.

Over the past two days, MSCI’s Global Investing Conference has explored a wide range of decarbonization strategies with experts from across industries.

We believe every industry and company has a role to play in getting the world on a sustainable emissions pathway. All of us must set ambitious targets and hold ourselves accountable for reaching them.

Accountability drives progress — and progress will bring us closer to net-zero.

You can watch replays of the conference by clicking here .