#### Need to know

• Orsted is headed for a 3.19°C warmer world, jeopardising global climate goals such as the Paris Agreement, according to MSCI.
• Shell is contributing to warming of 2.72°C, even though it emits 48 times as much carbon as the Danish renewables firm.
• UK investors are asking asset managers why their portfolios have high temperature scores, prompting concern that they will switch funds.
• MSCI’s methodology ignores carbon cuts that took place before 2020, such as Orsted’s sale of its fossil fuel assets.
• Every methodology needs a start date and MSCI will lower temperature scores for companies that set clear targets.

How can an offshore wind company contribute more to global warming than an oil company? That’s the question asset managers have for MSCI, the creator of an increasingly popular temperature-scoring tool used by investors.

Royal Dutch Shell, Europe’s biggest oil major, is on track to generate 2.72°C of global warming, according to MSCI’s Implied Temperature Rise metric. Orsted, the largest operator of offshore wind farms, has a warming score of 3.19°C

Fund managers that invest in clean energy are unhappy with MSCI’s metrics. “If it's just used for engagement, I do not have a problem with it,” says Craig Mackenzie, head of strategic asset allocation at Aberdeen Standard Investments (ASI). “The problem I do have is that these temperature scores are being used by our clients.”

Orsted is the seventh-largest holding in ASI’s Multi-Asset Climate Solutions Fund, which Mackenzie manages.

Orsted is not the only renewable energy company to get a failing grade. Xinyi Solar, a giant solar panel maker listed in Hong Kong, has a score of ‘over 4°C’, the highest possible under MSCI’s scoring system. Others involved in the transition away from fossil fuels also fare poorly. Tesla is a 2.6°C company; Nio, a rival Chinese maker of electric vehicles, is headed for warming of 3.38°C; Contemporary Amperex Technology, which produces batteries for electric vehicles, has a rating of more than 4°C.

Implied temperature-rise ratings provide investors with a rough and ready way to gauge a company’s contribution to climate change. MSCI begins by allocating a share of the planet’s carbon budget – the amount of CO2 equivalent that can be emitted before warming exceeds 2°C – to around 10,000 public companies. The final rating is calculated by comparing a company’s projected emissions with its budget and then working out how much temperatures will rise if the rest of the economy over or undershoots the global carbon budget by the same amount.

MSCI’s methodology contains some features that companies such as Orsted could view as unfair. It begins calculating firms’ emissions in 2020. Businesses that made big cuts before that date are not rewarded for doing so. MSCI also disregards some firms’ decarbonisation targets even if they have been approved by rival methodologies.

###### The point of my fund is to invest in companies that are saving the planet
Craig Mackenzie, Aberdeen Standard Investments

Few institutional investors currently use implied temperature-rise scores. A report released in November by the Task Force on Climate-related Financial Disclosures revealed that just 3.3% of asset managers and asset owners have calculated them. But that figure is likely to increase.

The TCFD suggests investors calculate implied temperature rise scores for their portfolios – and while it does not insist upon them, they are included in its standard reporting template. UK-based asset managers and life insurers will be required to produce TCFD-style reports from the middle of 2023. Regulators in the European Union and six other jurisdictions are also introducing similar disclosure requirements for at least some financial firms.