MSCI Helps Quantify Climate Risk

MSCI’s Climate Lab gives investors tools to align portfolios with climate goals.

Reviewed by: Jessica Ferringer
Edited by: Jessica Ferringer

Jorge MinaJorge Mina is head of analytics for MSCI. He is responsible for the index provider’s equity and multi-asset class risk and portfolio management products.

In early October, MSCI announced the launch of MSCI Climate Lab, a new application for enterprise-level monitoring and management of climate and financial risks. The ability to access climate data is of growing importance as climate risks garner more attention from the investing community.

The following transcript has been edited for clarity and brevity. What is the MSCI Climate Lab?

Jorge Mina: Investors need to be prepared to handle the commitments that they’ve made with net-zero. They need tools and data to align their portfolios with those targets. Climate Lab is a tool that allows investors to get a view across their entire enterprise, their portfolio, and their issuers of how they're doing in terms of reaching those goals. [Climate Lab helps them] identify what's contributing either positively or negatively toward the achievement of those goals. What was MSCI's motivation to launch these tools?

Mina:  We don't think there's any solution for investors right now. Everyone's making commitments to net-zero by a certain date. The first step in meeting those commitments is understanding where they stand today and what changes they might be able to make in their portfolios to progress toward those objectives.

Since there wasn't any solution readily available to do that in the marketplace—there were bits and pieces of a solution, but no comprehensive solution—and we have all the ingredients to put it together, we thought this would be a great way to help every institution that has a portfolio of financial assets, whether it's an asset manager, an asset owner—even the corporations that are trying to manage their own carbon footprints.

We have indices that apply the metrics that we generate through our climate models in our climate center to come up with indices, [such as those] that are aligned to the Paris goals. Could you elaborate on some examples of how investors might use the Climate Lab tool?

Mina: They can log on to the tool and their portfolio view will be right there in front of them. They would be able to have a high-level idea of where they are [with] their net-zero commitments. They can start drilling down into what's contributing to those things.

There are a number of metrics they can look at. They can look at carbon emissions in their portfolios, implied temperature rise, which is a metric we just released and we're very excited about; physical risk; transition risk; etc. They can then identify what's driving those things, and hence what actions they might be able to take to align their portfolios even better to their ultimate objectives. Are there areas of the market where incorporating this type of information is more important?

Mina: What investors need is a comprehensive view across all of their portfolios–equities, fixed income, private equities, cash, derivatives, long/shorts, real estate, municipal bonds, sovereign bonds, everything. This tool allows them to get a comprehensive view of their climate exposures across everything they own.

The underlying climate models will be different depending on what we're talking about. If you own an equity, the exposure would be driven by an understanding of the company, the issuer of that equity; similarly for fixed income, at least for corporate credit. If it's sovereign, then it's a different set of metrics. If it's municipal, it will be different. If it's a mortgage-backed security, it will be different.

You need to have an underlying climate model for each one of those assets and then map that to the instruments that you're holding in your portfolio. We have a climate center in Zurich that's in charge of modeling all those things. Was the development of the Climate Lab and these metrics driven by investor demand?

Mina: Absolutely. What's happening is that there is both a pull and a push. There is more regulatory demand coming, particularly in Europe, but in other areas as well. There is pressure from asset owners on asset managers and the underlying companies.

There is also the realization that climate risk is real, and will have a financial impact on the portfolios. This is both physical risk and transition risk. So the asset managers are being proactive in managing those risks. That's where demand comes from.

SFDR [Sustainable Finance Disclosure Regulation] is an example of the regulation. TCFD [Task Force on Climate-Related Financial Disclosures] is not a regulation, but it's becoming a standard that people are using to report as well. So those are the types of things that are driving demand from the regulatory or compliance side. Do you expect to see a shift in company behavior as data surrounding climate risk becomes more readily available?

Mina: Absolutely. We're seeing it with our peers. We're seeing it with ourselves in the way we conduct our business. [MSCI has] set out our own targets and we're tracking them closely. And we're looking at our carbon footprint. That's driving changes in everything we do, from the way you conduct business, to the companies you do business with, because this has a supply chain effect, [an effect on] business travel, all of that.

Contact Jessica Ferringer at [email protected]

Jessica Ferringer, CFA, is a writer and analyst for She has 10 years of experience in investment research and due diligence, including helping to manage ETF portfolios. Jessica has a bachelor’s degree in economics from Lafayette College and an MBA from the University of Pittsburgh.