Despite the 2015 United Nations Framework Convention on Climate Change Paris Agreement, current global warming is heading for at least 3°C by 2100. This is well above the goal of stabilising warming within 1.5°C and well below 2.0°C set out by the agreement. Emissions reductions of at least 40% by 2030 are needed to meet the 1.5°C goal, scientists say, with net-zero emissions necessary for global warming to stabilise.
Many investors are aware of the impact of climate change and likelihood of extreme weather events associated with global warming. While we can invest in adaptation measures, the primary focus must be on reducing greenhouse gas emissions, particularly carbon dioxide (CO2).
Carbon reduction without a net-zero goal in mind risks society falling into a Malthusian trap. Incremental emissions reductions may be taken up by population growth or increases in the carbon-based economy. For example, a 10% reduction in emissions per capital could be countered by a 10% increase in population, resulting in no overall decrease. Net-zero emissions are required to avoid this. Companies in all sectors will have to develop strategies for contributing to a carbon-neutral economy as well as reduce CO2 emissions.
Ideally, progress to net-zero should be by emissions reduction. However, residual emissions must be offset. Carbon offsets must be high-quality, realistic and verifiable and based on currently available technologies. Following PAS 2060 and the Greenhouse Gas Protocol, emissions should include all Scope 1 and 2 emissions and all Scope 3 emissions (What are Scopes of Emissions?) that contribute more than 1% of the total footprint.
Carbon-neutrality includes all greenhouse gas emissions. Apart from CO2 it includes other gases such as methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride and nitrogen trifluoride. PAS 2060 states that a carbon-neutrality declaration cannot be achieved only through offsetting, except at the start of the process. At later stages, emissions reductions are required. A declaration of achieving carbon-neutrality requires an entity to have achieved reductions in its carbon footprint and to have offset remaining greenhouse gas emissions.
The Net-zero Carbon (NZC10) target was developed to meet scientific climate requirements. A number of governments, companies and investors currently aim for net-zero emissions by 2050, which is estimated to be consistent with 1.5°C to 2.0°C of warming. Many initiatives adopted by sustainable investors reflect a 2050 aspiration. Our NZC10 target embodies a higher level of climate ambition with a 2030 net-zero goal. This 2030 target is consistent with keeping with keeping global warming below 1.5°C. Sustainable fund managers can use NZC10 to demonstrate leadership on global warming.
The Net-Zero Carbon 10 (NZC10) target requires that 10% or more of portfolio assets are invested in companies that:
The target offers clarity to fund and portfolio managers by proposing actions that investors can take within a standard framework. The intention is to tighten standards following climate science under the guidance of our ethical oversight committee.
To promote genuine leadership, NZC10 has a 2030 net-zero emissions target. In the low carbon transition, many firms will be late adopters, reaching net-zero only after 2050, if at all. Ethical and sustainable investors need to encourage companies to become net-zero well before 2050, both to reduce emissions and provide social leadership. The 2030 target embodied in NZC10 expresses a climate ambition consistent with keeping warming below the lower 1.5°C aim of the Paris Agreement. The NZC10 target is designed to be challenging yet achievable for commercial fund managers, to maximise impact.
For investors, including fund managers and portfolio managers, adopting NZC10 incurs no charge, However, those wishing to adopt it must register with P1 Investment Management (P1). P1 monitors the target to ensure standards are maintained, and that the NZC10 designation is not misused.
P1 Investment Management and target’s funds have sought to develop and progress the target. This led to Net Zero Carbon 20 (NZC20). NZC20 increases the minimum proportion of fund/ portfolio assets that must meet minimum requirements from 10% to 20%. It introduces an initial requirement for investment in funds that have realistic credible strategies for net-zero by 2030 to reduce reliance on engagement alone. The decision was taken to add a fossil exclusion requirement, so that funds adopting NZC20 cannot have exposure to climate-damaging activities which are inconsistent with net-zero emissions.
NZC20 also has enhanced minimum engagement requirements. We believe engagement has an important part to play, but for it to be a valid method for progression there needs to be requirements as to how it is conducted and recorded. We have also included enhanced registration and audit requirements for funds adopting NZC20.
The Net-Zero target proposes actions that investors can take to support the movement towards a net-zero emission economy and provides a standard framework for corporate engagement. The participating managers show how investing can address climate change. Recent UK Climate Change Committee recommendations for carbon-neutrality by 2050 seem ambitious, but many climate scientists advise stronger action. Working with scientists, we are undertaking a ‘gap analysis’ on how future NZC targets can more closely align with the climate requirement.
Although the emphasis on carbon neutrality by 2030 is ambitious, there are other aspects to consider for protecting the climate. Potential areas for development include the proportion of portfolio assets covered, methods of engagement, collaborations between investors, improved offsetting requirements and verification.
The fund managers who have already adopted the target are keen to move beyond the initial 10%, to 20%. Developments will follow climate science under the guidance of P1’s external ethical oversight committee.
Adoption of targets such as NZC allows a ‘silent pro-climate majority’ of investors to express their views. Apart from individuals with savings, this can include pension funds, trusts and charity funds.
Enhanced NZC targets will be challenging yet achievable, leaving no one behind. The existing NZC target will remain for existing users and as a stepping stone for investors who wish to adopt it later on.