July 26, 2021

In the Spotlight, July 2021 - How close is net zero to not zero?

For the net zero movement to live up to its potential, voluntary commitments must be accompanied by interim goals and government regulation.

Momentum is gathering behind Net-Zero pledges in what has been described as “one of the most successful environmental campaigns in history”. But is the emperor wearing any clothes? Has greenwashing simply been replaced with 2050 washing? For the net zero movement to live up to its potential, voluntary commitments must be accompanied by interim goals and government regulation to secure market convergence.


What does net zero mean?


The movement towards net zero is based on the goal to bring greenhouse gas emissions to “net zero” by 2050 to keep global warming to within 1.5 °C of pre-industrial levels. This does not mean zero emissions in the economy, but rather it refers to reducing emissions as much as possible, whilst increasing carbon sinks as much as possible, to the point where any remaining emissions can be absorbed by our earth systems or removed through technology, hence "net" zero.

The net zero movement has gained a lot of traction and a brand recognition most companies would die for. The most recent U.K. government Public Attitudes Tracker found that in December 2020, 76 percent of respondents were aware of the concept of "net zero," up from 52 percent in March 2020.


Both the financial sector and governments are embracing this momentum. The G7 under its UK presidency has made net zero an explicit goal, and 124 governments out of 202 surveyed have made net zero pledges ahead of the November World Climate Summit in Glasgow. The COP26 Presidency’s Race to Zero campaign has brought the Net Zero Asset Owner alliance together with the Net Zero Banking Alliance together under the new $70tn Glasgow Financial Alliance for Net Zero. More than one in five of the world’s largest companies have also made some form of commitment to reaching net zero emissions.

Making the clock tick on sustainable investing


The move towards net zero marks a welcome change in how sustainable investment is conceived. Sustainable investment is often presented as ‘win-win’ or ‘doing well while doing good’. However, net zero recognises that the green transition will cost. Net zero embraces an understanding of sustainability that is different than what sustainability economist, Duncan Austin labels as a “more sustainable than before” understanding. Instead, it introduces a limit-based approach to sustainability: We need to be sustainable enough before it is too late.


Net zero also highlights the need to disaggregate ESG scores. Viewing ESG as a single concept hinders the fact that addressing each element has distinct characteristics, and distinct timelines. Net zero shows us that the E is on a timer – it must be addressed sooner, rather than later.


In 2017 Anders Bjorn and his colleagues showed how this understanding was not widespread. Reviewing over 40,000 corporate responsibility reports, they found that only 5 percent referred to ecological limits. The focus on net zero in the last few years therefore introduces a much-needed urgency to sustainable investment.


A thousand ways to zero?


However, behind this simple and appealing theoretical idea lies an ambiguous and complex practice. Companies are measuring net zero in myriad ways. Many methodologies only focus on portfolio holdings, for instance on the proportion of companies held with net zero targets or qualifying as ‘green’ under given taxonomies. Yet simply holding a green company in one’s portfolio does not always mean that a financial institution is contributing to net zero by making the real economy any greener.


For some companies net zero means removing greenhouse gases from their entire operation, with some, such as Microsoft, even going so far as to offset their historical emissions. Other companies, including fossil fuel companies, maintain their fossil fuel investments while pledging net zero commitments in other areas of their processes, prompting widespread critique, including from school climate-strike movement, Fridays for Future.


A dangerous trap?


There is also reason to caution the embrace of net-zero. We recently wrote about the risks of techno-solutionism in an ESG context. Similarly, climate scientists have recently criticised net-zero for perpetuating a belief in “technological salvation” and a diminishment of the “sense of urgency”, calling it a “dangerous trap”.


They point out that the net-zero aspiration is built upon the assumption of “carbon dioxide removal” technology being feasible and viable in time, instead of actually implementing fossil fuel usage reduction.


There is certainly some truth to this concern about long-term optimism. In March 2021 Standard Chartered reported that 71% of the companies surveyed plan to make most progress towards net zero between 2030 and 2050.

With pledges like Shell’s commitment to achieving net zero by 2070, there is a risk that net-zero becomes little more than repackaging of the old understanding of sustainability.  


Step by step: Accountability through interim goals


Oneway to avoid such techno-solutionism is through gradual and interim goals. As Simon Hallett of Cambridge Associates says: net zero targets for 2050 are meaningless without nearer-term milestones, such as 2025.


To avoid becoming a new form of green-washing, net zero pledges must be grounded in gradual and interim targets.


It takes a village: Market convergence through regulation


Regulators have shown signs of early support to market convergence, but there is still along way to go. The market is slowly going in the right direction on its own. Standard Chartered reported that 61% of investors surveyed will not invest in a company lacking a net-zero strategy.


However, a net zero financial sector must be mutually intertwined with a net zero economy. The role of regulators is to provide an economy-wide structure to harness the momentum within the financial sector. For instance, a financial institution must know the transition plans for the companies they invest in, so that they may set their own net zero commitments. The UK’s example of making TCFD (Task Force on Climate-related Financial Disclosures) reporting mandatory is an important example of how public policy can support the net zero transition.


There is huge potential in the net zero moment. To harness this, the financial sector along with regulators must work towards credible commitments, interim goals and market governance.


Talk to us