Net-Zero Emissions: The Steps Companies and Investors Can Consider
The Steps to Net-Zero Emissions
To help prevent the worst effects of climate change, a growing number of companies are pledging to achieve net-zero emissions by 2050. In fact, the percentage of companies declaring a net-zero target nearly doubled from 2019 to 2020.
With urgency building, how can companies and investors approach net-zero emissions? The above infographic from MSCI highlights the steps these two groups can take, from defining a strategy to reporting progress.
Net-Zero Emissions: A Clear Process
Setting a net-zero emissions target means reducing carbon emissions to the greatest extent possible, and compensating for the remaining unavoidable emissions via removal.
Companies and investors can take four broad steps to move toward their targets.
1. Define Strategy
To begin, companies can measure current emissions and identify priority areas where emissions can be reduced. For example, ABC chemical company determines that its greenhouse gas (GHG) emissions far exceed those of its competitors. In response, ABC chemical company prioritizes reducing GHG emissions during material processing.
Similarly, wealth and asset managers can assess climate risks:
- Risks of transitioning to a net-zero economy
- Risks of extreme weather events
They can then map out a strategy to curb climate risk. For example, XYZ asset manager determines that 33% of its portfolio may be vulnerable to asset stranding or some level of transition risk. XYZ decides to lower its transition risk by aligning with a 1.5 degrees Celsius (2.7 degrees Fahrenheit) warming scenario.
2. Set Target
With a strategy set, companies can pledge their net-zero emissions commitment and set interim goals. They can also specify how their pledge will be achieved. For example, ABC chemical company could set a net-zero emissions target by 2050. To increase short-term accountability, they set an interim target to halve carbon emissions by 2035.
Wealth and asset managers can also set targets and interim goals, as they apply to their portfolios. For instance, XYZ asset manager could set a goal to decarbonize its portfolio 5% by 2025, and 10% by 2030. This means that the companies within the portfolio are reducing their carbon emissions at this rate.
|Business as usual||3.6℃ (6.5℉)|
|10% decarbonization||1.5℃ (2.7℉)|
As shown above, a 10% year-on-year decarbonization will align XYZ asset manager’s model portfolio with a 1.5 degrees Celsius warming scenario.
ABC chemical company takes immediate action consistent with its interim targets. For instance, the company can start by reducing the carbon footprint of its processes. This approach carries the lowest risks and costs. But to take larger strides toward its net-zero emissions goal, ABC could draw on renewable energy together with carbon-removal technologies as they are developed.
In the same vein, XYZ asset manager can move toward its decarbonization targets by adopting a benchmark index and reallocating capital. This could include:
- Increasing investment in clean technologies
- Re-weighting securities or selecting those that are “best in class” for ESG metrics
- Reducing risk exposure and targeting companies for shareholder engagement
- Selling holdings in companies with the greatest exposure
All of these actions will help XYZ become better aligned with its investment strategy.
4. Track and Publish Progress
Here, the actions for companies and investors converge. Both groups can measure and monitor progress, disclose results, and adjust as necessary.
For example, XYZ asset manager shares the following year-end results of its decarbonization strategy. The results compare the portfolio and its benchmark on their implied temperature rise and exposure to low-carbon transition categories.
(Portfolio - Benchmark)
|Implied temperature rise||3.2℃ (5.8℉)||3.4℃ (6.1℉)||-0.2℃ (-0.4℉)|
|Exposure to companies classified as:|
Asset stranding is the potential for an asset to lose its value well ahead of its anticipated useful life because of the low carbon transition. Companies with product transition risk may suffer from reduced demand for carbon-intensive products and services, while companies with operational transition risk may have increased operational or capital costs due to the low carbon transition.
XYZ asset manager’s portfolio has less risk than the benchmark. XYZ has also significantly reduced its exposure to transition risk to 11.3%, down from 33% in step 1. However, with an implied temperature rise of 3.2 degrees Celsius, the portfolio is far from meeting its 1.5 degrees Celsius warming goal. In response, XYZ begins to intensify pressure on portfolio companies to cut their GHG emissions by at least 10% every year.
A Climate Revolution for Net-Zero Emissions
The time to drive the transition to net-zero emissions is now. By the end of this century, the world is on track to be up to 3.5 degrees Celsius warmer. This could lead to catastrophic flooding, harm to human health, and increased rates of mortality.
As of July 2021, just 10% of the world’s publicly listed companies have aligned with global temperature goals. Preventing the worst effects of climate change will demand the largest economic transformation since the Industrial Revolution. Companies, investors and other capital-market participants can drive this change.
Can We Close the $11 Trillion Climate Investment Gap?
$11 trillion needs to be invested in nature-based solutions between 2022 and 2050 to combat climate change.
Can We Close the $11 Trillion Climate Investment Gap?
Nature-based Solutions (NbS) include actions to preserve or restore natural ecosystems to address social, economic, and environmental challenges effectively, while simultaneously providing benefits to the community.
To achieve its goal of limiting climate change to below 1.5°C by 2050, the UN says that substantial investment in NbS needs to happen. The same investments will also help stop biodiversity loss and deliver land degradation neutrality.
This visualization, sponsored by Carbon Streaming Corporation, explores the investment requirements for various NbS sectors and highlights the critical role of protecting many ecosystems in achieving climate targets.
The Crucial Role of Ecosystem Protection
Terrestrial and marine ecosystems are invaluable when it comes to addressing climate change. They act as natural carbon sinks, effectively absorbing and storing approximately 40% of global carbon emissions.
More specifically, the conservation and restoration of forests, wetlands, grasslands, coastal areas, seagrass, and peatlands is essential to keeping greenhouse gas emissions out of the atmosphere.
But to effectively combat climate change, the estimated cumulative investment required in nature-based solutions between 2022 and 2050 is $11 trillion.
|NbS Investment Area||Cumulative Investment Required 2022-2050 (US$ Trillion)|
|Restoration (Seagrass & Peatlands)||$1.6 Trillion|
|Other Land Management||$1.1 Trillion|
This investment will drive large-scale restoration, conservation efforts, sustainable land-use practices, and ecosystem protection.
A Closer Look at the Investment Gap
Currently, only 17% of NbS investment comes from private sources. However, the annual investment needs to increase fourfold by 2050, which amounts to $520 billion of additional annual NbS investment.
|Year||NbS Investment Required ($B per year)||Increase from 2022|
Collaboration between governments, the private sector, and international organizations is critical to mobilize resources, establish innovative financing mechanisms, and incentivize investments.
Benefits of NbS
Capital allocated to nature-based solutions not only helps combat climate change but also delivers a plethora of other benefits. For example, these solutions promote biodiversity conservation, enhance ecosystem services, support local communities, and foster sustainable development.
Investment in this space is crucial to meeting the UN’s 2050 goals. By financing the creation or expansion of nature-based carbon projects, our sponsor, Carbon Streaming Corporation secures the rights to future carbon credits generated by these projects.
Consumers and businesses can purchase these carbon credits to provide the necessary capital and immediate action needed to effectively combat climate change.
Learn more about Carbon Streaming and how you can get involved now.
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