Finding opportunities in disclosures
But global markets' gradual move towards mandatory reporting on environmental, social and governance (ESG) issues – especially climate-related disclosures – goes beyond providing insights on the sustainability of individual companies.
When a critical mass of businesses provides ESG information, that data can be used to discern broader trends, which in turn can be used to make money.
MSCI Research's latest report on climate action progress among companies on the MSCI AC Asia-Pacific Investable Market Index shows one way in which that analysis can be done.
MSCI Research assessed the transition plans disclosed by companies on the index and identified a number of clean-tech sectors that could experience increased demand because of companies' decarbonisation commitments.
A transition plan lays out a company's strategic decarbonisation goals, technology roadmaps and capital allocation to achieve short, medium and long-term targets.
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In the energy sector, MSCI Research found that companies with transition plans were planning to invest more in hydrogen, renewables, electric vehicles and carbon capture and storage (CCS).
All 16 energy companies that provided transition plans, in addition to 200 companies not in the energy sector, held hydrogen-related patents as at October 2024.
About 4 per cent, or 150 companies, of the index companies provide clean transportation solutions, MSCI Research said. Companies that generated more than 80 per cent of revenue from electric vehicles and hybrid electric vehicles had annual total revenue growth rates of more than 25 per cent, surpassing their peers.
In the utilities sector, MSCI Research identified clean energy and hydrogen-fired generation as strategic priorities for companies in the region, with more than 80 per cent of transition roadmaps indicating potential use of clean fuels. More than 70 per cent of the transition plans also referred to potential use of CCS.
A key area of research and development investment is in perovskite-on-silicon tandem solar cells, which have higher theoretical efficiency limits than the traditional silicon cells.
Almost all transition plans from the materials sector involved developing renewable-energy and low-carbon products.
Difficult transition
Steel, cement and hydrogen are examples of materials that require large amounts of power and have therefore been difficult to transition away from fossil fuels. Despite the energy-intensive nature of many of these products, MSCI Research found that less than half of companies in the sector were looking at adopting CCS.
The MSCI Research analysis is possible because the number of companies that reported their transition plans has been increasing, from 12 per cent of all the stocks on the index in 2022 to 22 per cent in 2024.
The numbers are expected to improve in the coming years as jurisdictions begin to adopt and implement global accounting standards that include disclosing transition plans.
The adoption of the accounting standards will also uplift the quality of the data, by increasing the sample size and improving comparability.
Harnessing the power of the financial markets is often touted as a critical requirement for fighting climate change at scale.
For that to happen, it is important that investors understand climate action not simply as a form of risk management, but as a source of profitable opportunities as well. More and better sustainability disclosures can enable analysis for this side of the equation.
As investors become more sophisticated about climate-related disclosures, companies will also find it easier to get noticed for credible climate strategies and progress on those strategies.
While sustainability reporting may require resources, companies that are transparent and committed could find the cost well worth the rewards.
This story first appeared in the BT subscriber-only ESG newsletter
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