As climate change intensifies, so does the need for action to slow global warming and transition to net-zero carbon emissions. The solution must come from all sides: policymakers, companies, asset owners, investment managers and academics—even individual citizens. Here are some of the more prominent topics that surfaced in our recent conversations with climate experts, asset owners and other stakeholders as the world works to tackle this pressing challenge.
A Global Challenge Requires a Collaborative, Cross-Discipline Effort
New insights reveal that the stakes of climate change are much greater than believed just a few years ago. Climate change is a highly nonlinear process that features waves of cascading events. Advances in climate modeling indicate that the warming scenario of 2°C seems increasingly as dire as the 4°C scenario seemed only a few short years ago, with tail risks grossly underestimated.
The world can still tackle this urgent challenge and achieve net-zero climate emissions in time. Reductions of 50% by 2030 are even possible, aided by changing investor sentiment and declining renewable energy prices. But achieving nationally determined contributions under the Paris Agreement will be a marathon—and no one has all the answers.
To move the needle further toward net zero, three broad spheres must coalesce: public policy, private sector activity and academic expertise. Public policy is needed to craft regulatory and fiscal frameworks that shape private sector action and unlock business opportunities. Incentives and mandates are needed to promote better climate disclosure, data and transparency.
The private sector must lead the way to net zero. The amount of investment needed to enable the transition is staggering—by some estimates on the order of $100 trillion by 2050, mostly from non-government sources. Asset owners, investors and other stakeholders collectively need to ensure that this capital is directed toward solutions and that issuers deploy capital in ways that enable net zero while also meeting their fiduciary obligations.
A key conduit in directing that capital is continued growth in the market for ESG-aligned investing, whether it’s traditional investments with ESG integration or purpose-driven strategies. Given the sheer scale of capital required, the field of solutions needs to expand and diversify to include tailored solutions directed at climate response and innovation. It’s targeted investment—not divestment—that will enable net zero.
We also can’t overlook the critical role of climate scientists, economists and policy experts, given their deep reservoirs of knowledge, access to oceans of data and connections to public sector research initiatives. Climate experts—and their colleagues in other disciplines—can help investors better understand climate change and sharpen their analysis and tools to dimension risks and opportunities.
Investors Must Expand Climate Knowledge and Tools
Given the massive amounts of private sector capital needed to fund the net-zero transition, it’s critical to target that capital effectively. Asset owners and investors are on the front lines in making those critical decisions. Whether it’s evaluating company transition plans, exploring new areas of opportunity or advocating for better behaviors, investors must go to school on climate change.
The analytical challenge itself is daunting. It’s not simply about determining the level of overall emissions for an issuer, or whether or not it’s aligned with a 2°C warming scenario. Analysts have to trace the physical and transition risks of climate change to income statements, balance sheets and business models to identify vulnerabilities and opportunities. What are the implications of climate change and the net-zero transition on an issuer’s revenues and costs? How will the transition affect market share and product mix? Climate costs can be direct (such as carbon taxes) or indirect (the cost of air scrubbers). As climate-reporting requirements ramp up, investors must apply a critical eye to sustainability reports and emissions data.
Engagement is equally important, not only in understanding risks and opportunities but in enforcing progress. We’ve answered the “whether” and “why” of the net-zero goal—asset owners and investors will help determine the “how.” Issuer transition plans must be assessed quickly and accurately, and coverage of issuers scaled up. From large-cap, developed-market firms to businesses in emerging markets, engagement is a clear channel in holding companies accountable for gaps in net-zero plans.
Focused engagement campaigns can help, as can collaborative engagement through international coalitions. Net-zero progress may be incremental, but it has to be tangible. The process needn’t be highly prescriptive, but issuers should be held to their commitments, even if it requires escalation—from broader discussions to open letters or shareholder resolutions. Divestment is a last-ditch effort: capital is most effective when it’s present and encouraging change, not absent.
Brown and Green Industries Have Vital Transition Roles
The focus on net zero and the need to limit global warming is already translating into investment preferences, with stronger premiums for leaders versus laggards. But there’s a clear place for “brown” issuers—companies not among the leaders but making meaningful progress and playing critical roles in enabling the transition.
The electric vehicle (EV) market is one example. EVs are a major cog in the plan to achieve net-zero emissions, and automakers are rolling out business plans to sell more of them—prodded by consumer demand and public sector regulation. However, batteries are needed to make EVs work, and the supply chain of EV battery components relies on traditional brown industries—notably the mining of lithium, cobalt, nickel and other minerals.
Investment capital must be deployed all along the EV chain to capitalize on opportunities and encourage growth. This doesn’t mean “brown” industries and issuers can keep operating at their own discretion, but simply divesting from brown industries that are transition enablers ignores the complex challenge of shifting an entire planet and society to a net-zero emissions model—and may hobble net-zero progress.
Instead, a distinction is needed between greenwashing—investors or issuers claiming to have sustainable strategies or products when they don’t—and issuers with high but falling carbon emissions. The contributions of these improvers to net zero stretch far beyond the EV example. Heavy construction industries are indispensable in building wind turbines or dams—and fortifying or relocating buildings in areas at risk from rising sea levels and severe weather.
A pragmatic lens views brown industries and organizations along a continuum. It acknowledges that they’re critical to the net-zero transition and need time—spurred by active engagement—to adapt and evolve. But there’s no indefinite lease for companies to clean up their act, and asset owners, investors and society should press them to make progress.
Data Needs: Better Quality, Broader Availability and Culture Change
Whether it’s measuring climate risks in investment portfolios, assessing issuers’ progress along their individual paths to net zero, or evaluating the best avenues for private funding to facilitate the transition, data and information are key.
Climate-risk modeling is a case in point. Available models are still young, with a wide variety of approaches, strengths and weaknesses. Expanding asset coverage should be a data priority, so that asset owners can better evaluate their adherence to net-zero-related commitments. Public assets are reasonably well covered, but it’s harder to get data on nonpublic assets and categories such as derivatives. Asset owners have enlisted asset managers to help—even hiring consultants to dig into specific properties.
Advances in data collection technology could help verify GHG emissions across the globe, though they remain several years away. Advances in sensor platforms, including mini-satellites and drones, could pin down emissions in hard-to-reach locations. As the data set matures in the next few years, climate scientists can help investors and asset owners derive relevant information.
What can stakeholders do while data “catches up” to net-zero ambitions? Scope 1 emissions data are in relatively good shape; some aspects of scopes 2 and 3 data are useful but need refining. The best foot forward for now is to use scopes 1 and 2 data while acknowledging that fundamental analysis and direct engagement will always be needed to interpret portfolio and issuer footprint calculations.
There seems to be broad agreement that a data culture shift would be welcome, given that data is expensive to access even when it’s available. Improved transparency and norms around data sharing would enable a shift from the notion of proprietary data toward publicly available repositories that can be reviewed for accuracy and interrogated by stakeholders.
This shift requires overcoming hesitancy in providing proprietary company-level data, driven usually by concerns about reputation or other consequences if initial data disclosures are later found inaccurate. Government and auditors could be enlisted in this effort, potentially by creating a “safe harbor” of sorts for the more transparent issuers and first movers in climate-data disclosure.
Don’t Let the “E” of the Climate Transition Obscure the “S”
We’ve also seen the desire to maintain a strong link between the “E” and “S” in ESG when it comes to the net-zero transition—a “just transition,” as the Paris Agreement puts it.
Just as poor and marginalized groups are more prone to suffer from global warming, they likewise face transition risks as entire economies and industries are reshaped. Consider the far-reaching impact on workers in areas where carbon-intensive industries operate, as those job numbers shrink and shift toward greener processes and facilities that may be geographically out of reach.
What becomes of lower-skilled workers as the job base is transformed to a greener profile requiring different skills and training? What happens to towns and communities that relied on declining industries to support their social and infrastructure needs? Recall the impact in the United States Midwest a generation ago as a sizable portion of the manufacturing base shifted offshore. The investment community also needs to recognize that, even as industries that are less environmentally friendly enable the transition (the EV example), they continue to have ecological impacts on regions and people. Those impacts must be minimized, managed and remediated.
Ensuring a just transition is a complex challenge. It requires a concerted effort to ensure that marginalized groups aren’t left behind. From an investor’s perspective, the ability to accurately integrate social considerations into investment decisions is a key tool. So is the ability to target investment capital to avoid undue harm to marginalized groups—and ideally to empower better outcomes.
Summing Things Up
These themes are by no means an exhaustive accounting of the considerations of the drive toward net zero, but they highlight the need for advances and collaboration across the public, private and academic spheres to match growing ambitions and commitment. A common thread running through the dialogues we’ve been having on net zero is the need for pragmatism.
This doesn’t mean lowering the bar for net-zero ambitions—it means staying focused on the ultimate goal while taking tangible, meaningful steps to advance progress while the world develops better mechanisms, tools and processes to facilitate that drive. In other words, we shouldn’t let the desire for perfection be the enemy of the good.