Four Important Takeaways from COP28

The United Nations COP28 climate summit ended with a historic agreement signed by nearly 200 countries. Now comes the hard part.

Fulfilling the pledges made in Dubai will demand tremendous work from policymakers and industries alike, especially since the U.N. Intergovernmental Panel on Climate Change says that limiting global temperature rise to 1.5 degrees Celsius this century will require greenhouse-gas emissions to fall 43% below 2019 levels by 2030 .

My MSCI colleagues have put together an insightful list of COP28 key takeaways for investors . I would like to share four of my own takeaways from spending a week among the world’s top climate leaders.

First, the private sector is not waiting for governments to act.

CEOs increasingly view climate change as not only a challenge but also an opportunity. They have responded by forming coalitions and initiatives aimed at galvanizing climate-related reporting, analysis and investment.

For example, MSCI is proud to support the Glasgow Financial Alliance for Net Zero (GFANZ), a group that champions climate action within the finance and investment industries.

On December 2 in Dubai, I participated in launching the Net-Zero Data Public Utility (NZDPU) proof of concept alongside many of my GFANZ colleagues, including co-chairs Mike Bloomberg and Mark Carney.

By expanding access to climate-related data through a free, open, centralized repository, the NZDPU can help investors and companies determine the best way to decarbonize their portfolios, operations and supply chains.

If we look at the recent progress made by listed companies, we see a mixed picture.

On the positive side, the share of MSCI All Country World Investable Market Index companies aligned with a 1.5-degree temperature-rise pathway increased from less than 10% in August 2021 to more than 22% in August 2023, according to the MSCI Net-Zero Tracker.

The Tracker also finds that listed companies in G20 member states decarbonized significantly faster than their respective countries from 2016 through 2021.

However, that dynamic is set to reverse, as most G20 countries are projected to decarbonize faster than their listed companies between 2022 and 2030.

This highlights the slow pace of transition in hard-to-abate sectors — such as heavy industry and transport — which produce a disproportionate amount of global emissions.

That brings me to my second COP28 takeaway: Climate standards must be fluid, flexible, and industry specific.

Hard-to-abate sectors present a unique challenge, and their transition pathways should reflect that.

Likewise, because climate projections are constantly changing, institutions should not be penalized for basing their emissions targets on outdated scenarios.

Standard-setters should instead create frameworks that recognize the evolving nature of climate data, the different obstacles facing different industries, and the nuances of low-carbon investments.

To cite two examples we discussed in Dubai:

Companies that buy carbon-intensive assets with the intention of turning them green will at least temporarily increase their total emissions.

Similarly, companies that provide transition finance for emerging markets will at least temporarily increase their financed emissions.

In other words, by taking steps to advance decarbonization, these firms will make their short-term carbon footprint look worse.

The journey to net-zero emissions will be filled with such paradoxes, and global climate standards must account for them. If they do not, it will be more difficult to attract Western capital for, say, the early retirement of coal-fired power plants in Asia .

That gets to my third takeaway: Global leaders increasingly see the voluntary carbon market as an essential tool for reaching net-zero.

At virtually every event I attended in Dubai, people stressed the growing importance of carbon credits.

In fact, the world needs an additional $90 billion of investment in carbon-credit projects to reach a level commensurate with a 1.5-degree pathway, according to a study by MSCI Carbon Markets (formerly known as Trove Research).

The voluntary carbon market has traditionally been hampered by inadequate monitoring, reporting and verification. Institutions simply could not confirm whether the credits they purchased — or wanted to purchase — represented genuine carbon reductions.

Advanced data and analytics can help solve this problem and deliver the transparency that companies and investors crave. Transparency promotes clarity, and clarity drives action.

What does all that have to do with early coal retirement?

Well, during COP28, the Coal to Clean Credit Initiative (supported by the Rockefeller Foundation) announced a pilot project?with ACEN Corporation (a renewable-energy firm) and the Monetary Authority of Singapore (MAS) to decommission a Philippine coal plant by leveraging carbon credits and replace the coal power with renewable power.

If successful, this project could serve as a template for linking the voluntary carbon market with early coal retirement around the world.

“We hope to road-test and learn from different approaches that can catalyze the use of high-integrity transition credits to support the early retirement of coal plants on a significantly larger scale,” declared MAS Chief Sustainability Officer Gillian Tan.

A day earlier (December 3), the U.S. State Department, the Bezos Earth Fund and the Rockefeller Foundation had unveiled the framework for a separate initiative, the Energy Transition Accelerator (ETA), which also seeks to mobilize transition finance for emerging markets using carbon credits.

Its architects project that the ETA could raise upwards of $200 billion by 2035.

This leads to my final COP28 takeaway: The revolution in artificial intelligence (AI) could play a critical role in decarbonization.

AI has fueled rising expectations about how data-driven technology might help us solve global challenges.

Throughout COP28, scientists and business leaders explored the potential of AI to clarify climate risks and opportunities for governments, industries and individuals.

MSCI recognizes this potential, and we have partnered with Google Cloud on generative AI that could make it easier for investors to understand climate exposures across asset classes.

With any luck, AI might eventually help the world answer broader questions about decarbonization, such as:

What is the ideal asset allocation and speed of transition that would allow us to reach net-zero emissions and adapt to a warmer planet while continuing to maximize economic prosperity?

Also, what is the most effective mix of public policies that would achieve the same goal?

Looking at climate finance in particular: How precisely should we divide our investments between mitigation and adaptation?

Which investments would deliver the greatest impact?

For companies: What is the most efficient way to decarbonize your operations and supply chain while still fulfilling your core mission and maximizing shareholder value?

For investors: What is the most efficient way to decarbonize your portfolio while still maximizing returns?

Nobody knows how soon, if ever, AI will be able to design such a net-zero roadmap. But research from Google and Boston Consulting Group has found that “scaling currently proven [AI] applications and technology” could mitigate anywhere from 5–10% of global emissions by 2030.

Of course, the quality of AI outputs depends on the quality of AI inputs. Even with advanced technology, the world still needs more climate-related data and models, and MSCI will continue doing our part to provide them.