Net zero: what is it and what does it mean for my investments? 

Holly Nardi - Redington

Holly Nardi

Associate, Investment Consulting
Friday, Apr 23
|   4 mins

You’d be hard pressed to open a newspaper, switch on the TV, or log on to LinkedIn without so much as a mention of net zero. It’s everywhere – and rightly so. Climate change poses a huge and immediate threat to us and our planet. In fact, the World Economic Forum has ranked climate change-related risks top of the pile for the past three years in a row: ‘climate action failure’ has been recognised as the greatest risk in 2021 with respect to its likelihood and its impact on global economic systems. Becoming net zero is our best chance of addressing climate change and our first step in securing a sustainable future for all.  

But what does net zero actually mean 

Put simply, net zero means removing the same amount of carbon (and other greenhouse gas) emissions from the atmosphere that we put in. Why? Because it would be impossible for us to stop emitting carbon overnight, the way we live our lives depends on it. While renewable infrastructure is a rapidly growing industry, most of what we do – from the way we produce our food, to the way we heat our homes – is still heavily reliant on processes that emit carbon.  

So, all the while we continue to push carbon into the atmosphere, we need to work extra hard to reduce our reliance on it (and remove it where there are no alternatives). This is the only way for us to achieve net-zero carbon emissions globally.  

How will we achieve this? 

Well, that’s where the Paris Agreement comes in. Our climate is already, on average, c.1°C warmer today than the pre-industrial era – with us humans being the main cause. This rapid rise in global temperatures has disrupted the conditions that have kept our planet relatively stable for the last 12,000 years. We’ve seen existing issues in relation to energy, resources, and food scarcity exacerbated and extreme weather events, such as flooding and wildfires, become increasingly frequent and intense. All of which have material impacts on global society and the economy.  

Enter the Paris Agreement. With an ambitious goal to limit global temperature increases to well below 2°C (ideally 1.5°C) by 2100, the Paris Agreement asks all countries to work together to reduce emissions by at least 45% by 2030, reaching netzero carbon emissions by 2050 at the latest.   

This is a monumental challenge. And, despite being the largest multinational climate agreement in history, the current pledges made by national governments are insufficient to achieve the goal of net zero. Reducing our reliance on carbon will require huge deployment of capital into infrastructure and innovation, which is where investors have a role to play.  

How can I align my investments with the Paris Agreement?  

First off, it’s important to differentiate between net zero in investment portfolio terms and net zero in real economy terms. The former doesn’t necessarily result in the latter if investors merely offload high-emitting investments. It also won’t eliminate your portfolio’s climate risk over the long-term. To do that, you’ll need to adopt an investment strategy that’s focused on contributing to the global transition to a net-zero economy – providing capital to assets that are essential to a de-carbonised world (such as renewable infrastructure) and actively engaging with high-emitting companies to help them align their operations with the ambitions of the Paris Agreement too. This could potentially increase portfolio emissions in the short-term, but it’s a meaningful impact over the long-term we’re looking for. We believe that the investment industry should be targeting net zero in the real economy to adequately manage the risk that climate change poses to assets while contributing to the real-world transition to a net-zero economy.  

Key takeaways

Climate change is a systemic global risk: the Paris Agreement sets out a clear path to mitigating this. However, achieving these ambitions will require action from all market participants. For asset owners, this will involve integrating climate considerations alongside investment decision-making – investing in the infrastructure that will play a crucial role in aiding our transition to a net-zero carbon emissions economy and actively engaging with companies to ensure they are Paris-aligned. 

At Redington, we’re taking steps to fully integrate sustainability across our entire business, with our default position focused on delivering tailored investment advice aligned with the goals of the Paris Agreement. We envisage most clients will achieve a 50% reduction in carbon emissions by 2030. 

We’re all in this together and collaborating is the only way we’ll achieve the right outcome. 

 

Source: World Economic Forum: The Global Risks Report 2021. http://www3.weforum.org/docs/WEF_The_Global_Risks_Report_2021.pdf

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