the-investment-industry-strives-for-net-zero Corporate /esg/insights/the-investment-industry-strives-for-net-zero content esgSubNav
Log in to other products

 /


Looking for more?

Net-Zero and the Investment Industry

In This List
Blog

ESG at the Forefront: The Investment Industry Strives for Net Zero


ESG at the Forefront: The Investment Industry Strives for Net Zero

What needs to happen to turn ambition into reality?

This is the first blog in a series examining the steps portfolio managers need to take to reach the goal of net-zero carbon dioxide emissions in their investment strategies by 2050. In this blog, we begin the discussion by asking, “What is net zero, and what are the implications for portfolio managers?”     

The 2016 Paris Agreement committed to net-zero emissions globally by the second half of this century in order to keep the rise in mean temperatures well below 2 degrees Celsius above pre-industrial levels, and to limit global warming to 1.5 degrees. To date, progress has been worryingly slow. Research by S&P Global Trucost shows that major global companies are on track for >3°C warming, falling 72% short of the required emissions reductions needed at this stage.[1] The recent explosion of net-zero commitments from companies, financial institutions, and countries provides welcome optimism. At the end of 2020, the United Nations found that countries representing more than 65% of global emissions and more that 70% of the world economy had committed to net-zero,[2] with the U.S. more recently adding its own pledge.

What is net zero?

Net zero refers to achieving an overall balance between greenhouse gas (GHG) emissions produced and those taken out of the atmosphere. Unlike gross zero, which would reduce emissions from all sources uniformly to zero, net zero allows for some residual emissions in sectors where abatement is either too expensive to pursue or not technologically feasible. It is assumed that any remaining emissions are offset by cuts elsewhere using a wide range of carbon dioxide removal techniques. This includes such things as afforestation, bioenergy with carbon capture and storage, and direct air carbon capture and storage. A situation of net-zero emissions occurs when the gross negative emissions (achieved through reductions and removal) match the gross positive emissions.

There are concerns by some environmental advocacy groups that these pledges are small and distant targets that require no action for decades.[3] In addition, these groups say there is not enough available land on the planet to accommodate all the corporate and government tree plantation plans for offsets, and that the focus should actually be on “real zero.” The Science Based Targets Initiative highlights the dual role that offsetting can play in science net-zero strategies, emphasising that offsetting measures by companies can play a critical role in accelerating the transition to net-zero emissions at the global level, but they do not replace the need to reduce value-chain emissions in line with science.

1. In the transition to net zero: Companies may opt to compensate or to neutralise emissions that are still being released into the atmosphere, while they transition towards a state of net-zero emissions.

2. At net zero: Companies with residual emissions within their value chain are expected to neutralise those emissions with an equivalent amount of carbon dioxide removals.[4]

Companies Get On Board for Net Zero

Net-zero commitments from major corporations across sectors and geographies accelerated in 2020, according to a blog by Principles for Responsible Investment (PRI).[5] This included giants like BP, Ford Motor Company, American Airlines, Woolworth’s, Hon Hai Precision Industry, and CEMEX.

The investment industry has also taken up the charge. The UN-convened Net-Zero Asset Owner Alliance launched in September 2019 is an international group of 34 institutional investors with asset under management (AUM) of $5.5 trillion U.S. that are committed to transitioning their investment portfolios to net-zero GHG emissions by 2050.[6] In addition, asset managers are increasingly committing to the cause. The Net Zero Asset Managers initiative, launched in December 2020 with similar goals, represents 30 signatories and $9 trillion in AUM.

While these steps should be applauded, a November 2020 poll revealed that just one in 10 businesses surveyed have backed up net-zero ambitions with science-based targets.[7] As a result, many businesses could miss their long-term climate goals. Establishing targets is especially challenging for portfolio managers who need to align their overall investment strategies with a green economy.

The Need for a Roadmap to Move Forward

There are complex issues for portfolio managers to address in order to see progress. For example:

  • How can a current carbon footprint be established in order to set a carbon emission reduction target, given the mix of companies in a portfolio?
  • How can carbon intensity be estimated for private firms or small- and medium-sized enterprises that do not disclose emissions?
  • What incremental improvement targets should be set year-over-year?
  • What risks could emerge if investments are negatively impacted by the physical impacts of climate change, or if companies are negatively impacted by policy changes aimed at accelerating the transition to a green economy?
  • How can a path to net zero be found while maintaining benchmark characteristics, a diversified portfolio, and appropriate risk-return measures?
  • How can investment managers and corporations work together to turn ambition into reality?

Adding to the challenges, there are many ESG reporting standards in place today. That makes it confusing for companies to know which one to use, plus a struggle for portfolio managers who need consistency and comparability for their analysis. It is well recognized that a globally-accepted ESG standard will improve the quality of disclosure, but the standards field remains quite crowded.

Fortunately, more data and tool sets continue to come to market to help portfolio managers create a roadmap for their journey to net-zero and take action. In the next blog, we will highlight the use of available information and analytics to create a carbon-intensity baseline for a portfolio in order to measure improvements over time.

Read the next blog in this series: Creating a Baseline Carbon Footprint.

[1] “State of Green Business 2021: Climate Risk,” GreenBiz Group and S&P Global, 2021,
www.spglobal.com/marketintelligence/en/news-insights/research/state-of-green-business-202

[2] “The race to net zero, and why the world depends on it”, UN News, December 2 2020,
https://news.un.org/en/story/2020/12/1078612

[3] “EXPLAINER- NOT ZERO: How ‘net zero’ targets disguise climate inaction”, Corporate Accountability, October 2020,
www.corporateaccountability.org/resources/explainer-not-zero/

[4] “Foundations for Science-based Net-zero target setting in the corporate sector”, Science Based Targets Initiative, September 2020,
https://sciencebasedtargets.org/resources/legacy/2020/09/foundations-for-net-zero-full-paper.pdf

[5] “Seven major companies that committed to net-zero emissions in 2020”, December 15, 2020, PRI,
www.unpri.org/pri-blog/seven-major-companies-that-committed-to-net-zero-emissions-in-2020/6909.article

[6] “UN-convened Net-Zero Asset Owner Alliance”, PRI, March 2020,
www.unepfi.org/net-zero-alliance/

[7] “Survey: Just 1 in 10 businesses have backed up net-zero ambitions with science-based targets”, South Pole, November 26, 2020,
www.southpole.com/fr/news/survey-just-1-in-10-businesses-have-backed-up-net-zero-ambitions-with-science-based-targets