Economies, businesses and investors around the globe are joining the UN Race to Zero and committing to net-zero 2050 targets. It is estimated that reaching net zero 2050 will require around $1-2 trillion of investment every year.¹ Investors therefore have a critical role to play in making net zero happen through their capital allocation and engagement activities.
At ASI, we are committed to playing a constructive role in the decarbonization of the global economy and enabling our clients to reach their net zero goals. That’s why we have joined the Net Zero Asset Manager initiative. We are developing net-zero solutions and will work with current and prospective clients to outline how net zero goals can be delivered alongside risk-adjusted returns. We also aim to increase the percentage of our AUM that is aligned with net zero over time in support of our clients’ aims and expectations.
What is needed to enable investing for net zero 2050?
It is critical that the growing wave of net-zero pledges is reflected in policies and actions to provide investors with certainty and the right incentives to enable capital allocation for net zero in the long term. Countries with net-zero pledges represent nearly 70% of GDP and more than 60% of global greenhouse gases,² which is extremely encouraging. But, unfortunately, we are far from being on track to meet net-zero 2050 goals. The recent UN Emissions Gap report³ highlights that even if all current net zero pledges were implemented, we would still fall short of keeping warming to below 2°C. In addition, most country’s Nationally Determined Contributions (NDCs) to achieve the goals of the Paris agreement remain inadequate, as highlighted in the recent UN NDC Synthesis report.⁴ We need to see a significant step-change in policy commitments ahead of COP26 to send the right signals for net zero investing to businesses and investors.
We think that investing in companies with ambitious and credible decarbonization targets rather than divesting has a bigger impact on achieving net zero in the real world
What does investing for net zero really mean?
It is important to differentiate between achieving net zero in the real world versus a portfolio. Real-world decarbonization is key. One could decarbonize a portfolio easily by reducing or eliminating exposure to companies in carbon-intensive sectors such as steel, cement and power generation. A portfolio’s temperature alignment score would look very good in that situation. But we will still need these sectors in 2050, and they need investor capital to be able to innovate, decarbonize and transition – and play a significant role in decarbonizing economies. Therefore, we think that investing in companies with ambitious and credible decarbonization targets rather than divesting has a bigger impact on achieving net zero in the real world.
This is also the core message of the recently launched IIGCC Net Zero Investment Framework (NZIF),⁵ which ASI contributed toward. The framework provides a foundation for how we develop net-zero solutions. The core features are detailed below:
- Decarbonizing by investing in "transition leaders" – this means not just considering a carbon footprint, but taking a forward-looking view and assessing credible transition strategies
- Allocating capital to climate solutions – this means investing in assets and companies that help the world decarbonize – from renewable infrastructure and low carbon buildings to electric vehicle manufacturers and energy efficient technology providers
- Net zero stewardship – this means developing a clear net zero engagement strategy with milestones and targets that focus on the most carbon-intensive companies in the portfolio
How do you assess that your portfolio is on track for net zero 2050?
1. Developing a robust target-setting framework
One of the challenges in net-zero investing is to develop robust and meaningful targets and understand the drivers behind any progress made towards these targets. Decarbonisation progress needs to be tracked against net zero 2050 emissions pathway — this means around 40-50% emission reduction by 2030. The Net Zero Asset Owner Alliance target-setting protocol suggests an emissions reduction target of 16-29% by 2025, either using absolute or intensity carbon metrics — the latter normalizes absolute emissions; for example, by dividing emissions by revenue or fund value. Using intensity metrics for decarbonization targets is useful for comparison purposes, but needs to be interpreted carefully. The carbon intensity metric could fall due to changes in the denominator (e.g., revenue increasing) even if absolute emissions go up.
It is also important to carefully assess appropriate targets at portfolio, country, sector and firm level. At sector level, mitigation costs and available technologies can differ significantly and this impacts optimal decarbonization pathways. For example, what is appropriate for power generation where cost-competitive renewables can drive decarbonization would not be appropriate for long-range transportation such as shipping. There is also a geographic dimension to consider as developed market economies ought to be decarbonizing more quickly than most emerging market economies, even along a net zero pathway.
We are currently developing a net-zero target-setting framework that will incorporate these considerations.
2. Take a forward-looking view
The other important aspect is to take a forward-looking view when constructing portfolios. That means not just looking at carbon emissions today, but where we believe company or asset carbon emissions will be in the future based on their transition plans – and whether this matches the desired decarbonization trajectory.
To develop this view, we undertake rigorous climate-related research, drawing on sophisticated tools such as our climate scenario analysis framework. This allows us to assess the risks and opportunities related to different climate scenarios (including net zero 2050), understand projected carbon trajectories and the impact of a net zero 2050 scenario on asset values.
In our actively managed products we also evaluate companies’ positioning and management teams’ forward-looking decarbonization strategy and targets, coming to our own proprietary views on how well companies are positioned for transition — particularly for the largest emitters. This is based on active research and engagement, supported by data such as SBT and TPI scores.
We are excited to be part of the Net Zero Asset Management initiative and will work with our peers and clients to continue to drive best practice around net zero investing. For example, through our continued involvement in the IIGCC Paris Aligned Investment Initiative. We are working on developing net zero solutions across different asset classes focused on real-world impact and will provide more transparency on that in due course.
We will also explore the topic of investment solutions for net zero at our next Global Climate Action event in June, sharing insights on net zero from different asset classes.
¹ Energy Transitions Commission: Making Mission Possible, Sep 2020
² Energy & Climate Intelligence Unit, accessed 18 March 2021: https://eciu.net/netzerotracker
³ UN Emissions Gap report 2020, accessed 19 March 2021: https://www.unep.org/emissions-gap-report-2020
⁴ UNFCC NDC Synthesis report, Feb 2021, accessed 19 March 2021
⁵ IIGCC Net Zero Investment Framework, March 2021