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MSCI: all eyes on climate change, human capital and stakeholder capitalism

3. Re-valuing real estate: investing in the eye of the hurricane

In 2020 MSCI expects to see greening a property portfolio become more than a ‘nice-to-have’ reputation booster. It will become an imperative. Real estate investors face both physical risks from weather events and policy risks, for example from a potential ‘brown discount’, if they don’t kickstart their journey to carbon-zero. Real estate investors should consider the following in 2020.

Think globally, regulate locally: commitments like the Paris Agreement dominate conversations. Yet local level targets may matter most for real estate investors. For example, 19 cities globally have committed to achieve net-zero carbon emissions in new buildings by 2030 and for all existing buildings by 2050. Investors may be reassured by the withdrawal of the US from the Paris agreement, but four of the 19 cities that committed to meet net-zero carbon targets for their buildings are US cities.

Growing climate change risks: MSCI finds 68% of the total capital value of US properties in the MSCI Global Annual Property Index was exposed to at least one of the following climate hazards: hurricanes, water stress, wildfire.

Green premium turns to brown discount: Green buildings have been increasingly incentivised in recent years. As the market continues to mature in 2020, green buildings may become the new normal, compressing the market into one where a ‘brown discount’ is put onto buildings struggling to meet new energy standards.

4. The human capital paradox: juggling layoff against shortages

In 2020 more companies will have to become human capital multi-taskers. Companies will need to let some workers go, whilst recruiting new, scarce kinds of talent. Two themes will dominate 2020.

Human resources are dealing with shortages and gluts at the same time: the automobiles industry in particular is struggling with this. Despite letting people go, there are reports of talent shortages around the globe as automakers struggle to meet new demands. Among the 65 MSCI ESG industries, there were 33 in which at least 5% of companies had undergone major layoffs in the previous three years. Of these, 25 were found among the top half of all industries by average talent requirements.

The race to find talent is drawing in companies beyond the usual suspects: not only companies in tech, healthcare and finance are racing to find talent. Energy companies, utilities, steelmakers and restaurants face the same challenge.

5. Keeping score on stakeholder capitalism: looking for accountability in new places

In 2020 stakeholders will evolve their activism, joining forces with willing shareholders to ensure companies are really ‘walking the talk’ when it comes to their stakeholder commitments. In August 2019, signatories of the World Economic Forum and Business Roundtable statements (‘purpose pledgers’) acknowledged the importance of all stakeholders, not just shareholders alone.

Purpose pledgers are not automatically set apart from peers: MSCI research of ‘purpose pledgers’ compared with MSCI World Index peers, reveals that their explicitly stated intention to be purpose-driven sets the ‘pledgers’ apart more than their actual track record.

In time, not only shareholders will hold companies to account: within stakeholder groups, customers and employees are having a growing influence in holding companies to account. Suppliers and communities tend to have the least influence in holding companies to account, unless shareholders have stepped in to lay claim to the interests of suppliers and communities.

james.wallace@realassetmedia.com