Investing for Net-Zero

Investing for Net-Zero

Thus far, 60 countries, as well as a plethora of companies and cities, have adopted net-zero by 2050 targets. Originally proposed in the Paris Agreement, the coalition towards net zero emissions by mid-century is growing. But commitments must be backed by bold, credible actions.

Climate change is a massive problem. In 2021, nobody would dispute that fact.

Inventiveness, both in terms of new technology and outside-the-box thinking, is of paramount importance. To spur these initiatives on, investments are needed. A lot of investments.

It is estimated that reaching net-zero by 2050 will require around $1-2 trillion of investment every year. Public funds won’t be enough – private money is needed to meet this end. Therefore, investors have a critical role to play through their capital allocation. 

What’s the best course of action for the everyday investor?

What Does Investing for Net-Zero Really Mean?

Achieving net-zero in a portfolio is very different from achieving it in the real world. 

To decarbonize a portfolio, one could simply eliminate exposure to carbon-intensive sectors such as steel, cement, and power generation. But that won’t solve the problem. Those sectors will still be needed in 2050, and they will need investors’ capital to innovate and transition. Arguably, these are the sectors that should receive the most investment. 

Therefore, rather than divesting, investing in companies with ambitious and credible decarbonization strategies will have the biggest impact on achieving net-zero in the real world.

Decarbonization by investing in ‘transition leaders’ will force companies to compete with one another for effective and substantive solutions to receive capital. Which of Chevron, Exxon Mobil, and Phillips is the largest oil company in 20-30 years may in large part be due to their decarbonization efforts.

Science-Based Credibility

Net-Zero by 2050 is a target based on science meant to mitigate human worsening of environmental and climate change issues. If the goal is science-based, the approach should be as well. Without a definite approach, pledges may too easily default to speaking about ambitions rather than how they will actually get there.

The effectiveness of decarbonization campaigns is inherently subjective. Each pledge will likely have different goals and different metrics for measuring success. 

Third party organizations can solve these issues by providing objective tracking to a broad range of categories, which can then be synthesized and scored to provide investors with simple peer-to-peer comparisons. Although it will be difficult to create and implement, this type of accountability is the only scalable solution which makes sense.

Setting targets may not be perfect science, but if a pledge sets these targets, at some point they will really need to set out to achieve it, or face public scrutiny.

Looking Ahead

There are countless pathways available for both pledges and investors. It won’t be easy for either party to find the best solution.

The good news: both are committed to net-zero and both are intent on exploring all available options. Over time, it will become easier and easier for pledges and investors to emulate their successful peers, compounding the effects of any progress that is made.

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