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Path to Net Zero Riddled with Potential Pitfalls


Path to Net Zero Riddled with Potential Pitfalls

In the growing climate change movement, “net zero” has become the buzzword. Over the past six months we’ve seen an absolute proliferation in companies and countries setting goals to reach net-zero emissions by 2050. While the concept of net zero seems straightforward at first blush, the path to achieving it is riddled with potential pitfalls.

Challenges include agreeing on a formal definition of the term, ramping up global financing and infrastructure investments, and ensuring green technology advancements occur and their costs are reduced or subsidized to enable a rapid shift away from carbon-emitting fossil fuels. Other hurdles include picking the right carbon offsets, not relying on renewable energy credits alone, attaining the right balance between climate-related policies at the federal and local levels, and starting the ball rolling on hard-to-decarbonize sectors.

This is the first in a series of thought leadership pieces on net zero that S&P Global is releasing in conjunction with Earth Day. In subsequent research we will dive into carbon offsets, renewable energy credit, emissions in the shipping industry and the financing for net-zero goals. 

Not addressing climate risks, including those associated with carbon prices, could prove costly. S&P Global Trucost data shows1 that major global companies face up to US$283 billion in carbon pricing costs and 13% earnings at risk by 2025, under a high carbon price scenario.

Moreover, major global companies are currently projected to align with a greater-than-3-degree C global warming scenario, falling 72% short of required emissions reductions to achieve the Paris Agreement on climate change. Countries that are parties to the Paris Accord agreed to initially aim to limit global warming to 2 degrees C this century relative to pre-industrial levels. But the accord also includes a broader and more ambitious aim of reducing emissions enough to limit warming to 1.5 degrees.

Source: S&P Global Trucost. Data as of November 2020. For illustrative purposes. Data showcase is based on companies listed on the S&P Global 1200 index, selected to represent a global supply chain, equity portfolio or loan book. The index covers 31 countries and approximately 70 percent of global stock market capitalization.

Just what is net zero?

In simple terms, a net-zero target means a company or entity is pledging to reduce emissions as close to zero as possible and then using carbon offsets or sequestration technologies to net out the remainder of their emissions — in other words, working to become carbon neutral. 

But what is less clear is whether countries and companies with these targets are taking every step possible to curb their emissions before turning to offsets. For example, China has pledged to be carbon neutral by 2060 but still expects its annual emissions to continue climbing for several years, peaking sometime before 2030.

One group aims to help companies ensure their net-zero goals are credible. The widely respected Science Based Targets initiative, or SBTi, is developing a certification program for net-zero targets in addition to its existing certifications for corporate targets that align with 2-degree or 1.5-degree global warming scenarios. The comment period on the net-zero certification consultation closed in March.

More than 2,000 governments and businesses appear to have taken the net-zero pledge. The United Nations Race to Zero Campaign, for example, includes a coalition of about 1,675 businesses, 85 large investors, and more than 470 cities.

But progress is uneven among sectors and geographies. For example, a review of company climate targets as certified by SBTi shows that European companies make up the largest portion, followed by Asia and North America. 

Even within Europe, companies are on an only slightly better trajectory than major companies globally. The targets of major European corporates are in line with a 2.7-degree warming scenario, the sustainability disclosure platform CDP and consulting firm Oliver Wyman found in a March report.2 

Some sectors, like electric utilities, have a relatively clear path to decarbonization that largely involves shifting from fossil-fuel generation to lower cost renewables and battery storage. But many other industries, such as shipping and steel manufacturing, don’t have inexpensive options or the same level of federal incentives and tax subsidies available to make that shift.

A long way to go to finance the transition

And if we’re going to achieve global net-zero emissions by 2050, we will need financing on a far larger scale than what is currently being dedicated toward that end.

For example, the United Nations Intergovernmental Panel on Climate Change in 2018 estimated the world needs to invest about $3 trillion annually under a 1.5-degree scenario. 

Of that amount, about $2.4 trillion — or about 2.5% of global GDP — will be needed annually over the next 15 years for clean energy-related investments, the IPCC said.3 In comparison, global total investments in clean energy and energy efficiency in 2019 reached only US $635.8 billion, according to the International Energy Agency.4 The world would need to invest about 3.8 times that amount annually to achieve the IPCC’s 1.5-degree scenario.

But transition-focused financing, including debt issuance products like green bonds, could help put a dent in overall investment needs. Transition finance could provide up to $1 trillion annually over the next 30 years, S&P Global Ratings estimates.

Joachim von Amsberg, vice president of policy and strategy at the Asian Infrastructure Investment Bank, in an interview said the U.S. rejoining the Paris agreement, combined with the European Union’s net-zero goals and China’s carbon neutrality commitment, should also help move the needle on net-zero financing.

“The ratcheting up of countries’ plans…is inevitably going to lead to shift for demand for financing toward low-carbon, no-carbon or even negative-carbon projects,” von Amsberg said. “You also have financial institutions that make increasingly firm commitments on what they are financing or they have their own net-zero timeline which will then also redirect their financing toward where the demand is going.”

Audrey Choi, chief sustainability officer and chief marketing officer at Morgan Stanley, said that action needs to be synchronized and speedy.  

“Climate action is going to require coordinated action not only from finance and corporates but also from policymakers, globally,” Choi said during a March panel hosted by the sustainability focused investor network Ceres. “And this is an area where we really need to think about how can all those things be pulled together for the most efficient, smartest and ... fastest way towards dramatic action on climate change.”

While companies, the financial sector and governments still need to figure out the path forward, Choi suggested that setting a net-zero target is a good first step. 

“No one necessarily has all the answers, but we've never done anything in the history of humanity without first declaring intent,” she said. “This is a time where it's unquestionable that we need a bold declaration of intent because then and only then can we marshal all the resources to get there collectively.”

[1]  https://www.essentialsustainability.com/climate/transition-risks/

[2]  “Running Hot: Accelerating Europe’s Path to Paris,” CDP Europe Report, March 2021, Oliver Wyman, https://6fefcbb86e61af1b2fc4-c70d8ead6ced550b4d987d7c03fcdd1d.ssl.cf3.rackcdn.com/cms/reports/documents/000/005/578/original/Running_hot_-_accelerating_Europe's_path_to_Paris.pdf?1615190423

[3]  “Special Report: Global Warming of 1.5°C,” The Intergovernmental Panel on Climate Change (IPCC), https://www.ipcc.ch/sr15/chapter/spm/

[4] Source: https://www.iea.org/data-and-statistics/charts/global-investment-in-clean-energy-and-efficiency-and-share-in-total-investment-2015-2020