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Morgan Stanley has reduced its climate target and issued a warning about a sluggish transition to a more sustainable economy.

Morgan Stanley has adjusted its emissions reduction expectations for its corporate lending portfolio, citing a slow transition to a greener economy, as reported by the bank's chief sustainability officer to Reuters. Factors such as a decline in electric vehicle sales, slow adoption of biofuels in aviation, and challenges in funding and policy within the power sector are hindering progress, Jessica Alsford stated.

While some banks, like Dutch firm ING, have reduced lending to certain sectors like oil and gas, Morgan Stanley expressed caution in doing so too rapidly. The bank emphasized that if the pace of change does not accelerate, both its clients and the bank itself may not meet net-zero-aligned targets.

In light of these challenges, Morgan Stanley's new lending approach aims to align with limiting global warming to between 1.5 and 1.7 degrees Celsius, softening its previous target of strictly 1.5 degrees. Alsford explained that current technologies and policies do not fully support a 1.5-degree target, and the adjusted range acknowledges the difficulties faced by the global economy while still aligning with the Paris Agreement.

The Paris Agreement seeks to keep the average temperature rise since industrial times well below 2 degrees by 2050. Despite experiencing record temperatures worldwide, emissions from many companies continue to rise. A recent U.N. report indicated that the planet's average temperature increase is projected to reach 3.1 degrees by 2100.

Morgan Stanley's updated strategy includes specific emissions reduction targets by 2030 for six sectors: Energy, Power, Autos, Chemicals, Mining, and Aviation. The bank has also reset its baseline for these targets from 2019 to 2022, citing better data for the more recent year.

The new plan involves adopting a "physical intensity" methodology to track emissions per unit of production or generation, aligning the bank with its peers and clients. For the Energy sector, operational emissions are targeted to decrease by 12-20% by 2030, while end-use emissions aim for a reduction of 10-19%. However, factors such as energy security could impact these outcomes.

In the Power sector, emissions across the lending portfolio are expected to decrease by 45-60%, contingent upon necessary funding and policy support to meet growing demands, including those from artificial intelligence technologies. The Auto sector aims for emissions reductions of 29-45%, though the bank warned that electric vehicle adoption is lagging behind the necessary rate.

For Aviation, emissions are targeted to fall by 13-24%, primarily driven by the use of sustainable aviation fuel. While the International Energy Agency (IEA) has projected a 10% usage rate by 2030, some airlines are only targeting 5-7.5%. The bank highlighted significant challenges in ensuring supply meets demand at cost parity, which is essential for airlines to achieve their interim emission reduction goals and for the bank to meet its aviation targets.

Chemical sector emissions are expected to decline by 18-28%, depending on the scaling of emerging technologies such as green hydrogen and carbon capture and storage. For the Mining sector, Morgan Stanley aims to reduce portfolio emissions by 23-31% through initiatives like increasing the use of renewable energy.