Navigating the Transition to Net Zero

Since 1990, just 100 global companies are responsible for 71 per cent of the world’s greenhouse gas emissions, according to data from CDP. Last November, more than 1,000 companies collectively worth some US$23 trillion set emissions-reduction goals that line up with the Paris Agreement. Additionally, US$130 trillion in assets under management are commit- ted to net zero by 2050 under the Global Financial Alliance for Net Zero (GFANZ), an independent body unifying private sector net zero finance initiatives.

In June last year, we committed to ensuring that our portfolios achieve net-zero emissions by 2050 and became signatories of the Net Zero Asset Managers Initiative (NZAMI). But while net zero is the critical 2050 goal, we need to see tangible progress in the shorter term. Therefore, managers that have committed to NZAMI are also required to set a 2030 commitment.

Scientific analysis recommends a 7.6 per cent per year reduction in emissions – or 50 per cent by 2030 – to provide a greater than 50 per cent probability of limiting global warming to 1.5°C. While we can point to laudable commitments, examples of short-term progress on emissions are few and far between. The reality is the transition will not be linear or simplistic, especially for companies in carbon-intensive emerging market economies. When one accounts for the complexity that socio-political, historic, and economic context add to the carbon-reduction equation, it is clear that not all carbon is created equal and net zero will for many not be a simple path.

Willingness To Change

We believe that remaining invested in the high carbon emitters in our existing portfolio, specifically those in emerging markets, is the right thing to do. It is not about where a company’s carbon position is today – rather it is about their willingness and ability to change. In contrast, divesting from high emitters to cleanse a portfolio does not contribute to real-world decarbonization.

The good news is that we are starting to see corporates in emerging markets taking the transition seriously, with many pledging to achieve net-zero emissions by 2050. They even include companies from the hard-to-abate industries, like cement manufacturer PPC, paper and pulp producer Sappi, and Sasol, the South African chemical and energy company.

The bad news, however, is that most companies – globally, but particularly in emerging markets – do not yet have a clear plan on how they’re going to get to net zero by 2050. We believe it is our role as shareholders to encourage, measure, and engage the high emitters in our portfolio on their transition and go on the journey of transition alongside them, with special focus on emerging markets.

What does net zero success look like for us in 2030? It’s having as many companies as possible in our portfolio with credible, financeable, actionable plans to decarbonize by 2050. To achieve this, we are taking the assessment of the viability of our portfolios’ transition into our own hands. We have developed a framework that scores companies’ transition plans on three key principles across nine elements of transition.

➢          Is the transition plan ambitious enough?

This is not just about the 2050 target. This assesses the quality of the emissions disclosure and the milestones set along the way.

A sufficiently ambitious plan can be achieved via one of three routes. The first – and the simplest – is if the company manages to reduce emissions by the seven per cent a year required. Unfortunately, for most companies this linear recommendation is not realistic, particularly if they are in emerging markets and in high-emitting industries.

The second route is whether the pathway set by the company is broadly aligned with the country’s decarbonization pathway in which it is based, provided the country’s pathway is broadly 1.5-degrees aligned. A company with a plan that fits within these parameters would be considered as aligned to the country’s nationally determined contributions.

The third is one in which modifications will be required for hard-to-abate sectors such as cement, steel, and chemicals. We are starting to see sectoral pathways being developed which would be considered to be 1.5-degrees compliant. The reality is that some sectors require significant technological developments to achieve net zero by 2050 and others will need to pivot their business models entirely to be considered as 1.5-degrees aligned.

Achieving net zero is a global problem. The expectation is for sectors and countries that can achieve it more easily to decarbonize faster and for hard-to-abate sectors and developing countries to take longer.

➢ Is the transition plan credible?

The second principle looks at credibility; namely whether the company has a time-bound, clearly financeable, and just transition strategy.

Indicators of a credible strategy include:

▪             The plan is based on existing low-carbon technology rather than new, unproven technologies

▪             The company is not relying on divestment of high-emitting assets or carbon offsets to decarbonize

▪             The company has planned to generate significant revenue from low-carbon products and services

In addition to strategy, financial planning and allocation to transition are critical considerations. The capital expenditure requirements, the impact on revenues and expenditures of this plan, and whether the company can afford it, are all indicative of how seriously the company is taking transition planning.

Finally, the credibility of a plan hinges on the inclusivity of it and how it addresses and supports justice for workers and communities who will be impacted by the transition. A credible plan is considerate of those most vulnerable and ultimately should contribute to building resilient, thriving, and healthy communities.

➢ Is the plan implementable and measurable?

The final principle for consideration is the feasibility of a plan. This looks at the governance structures, levels of stakeholder engagement, and metrics of progress that signify whether a plan is implementable.

Cohesive engagement and lobbying efforts signify alignment of the company plan with the broader environment in which the company operates. If a company has 1.5-degree Paris-aligned lobbying positions and its direct lobbying activities align with stated values, this gives comfort that the company’s actions match their intentions.

Good governance structures, with clear oversight of transition-related strategy at board level, are an indicator that the transition plan has full leadership buy-in, ensuring transparency and accountability.

Indicators of progress are the final element of measurement. Carbon reduction, of course, is the key metric of success. But carbon is not the only consideration, especially in the early years of transition.

Rather, we look for tangible signs of progress, including:

▪             investment in transition-related capacity-building

▪             new partnerships and acquisitions that enable the company to transition

▪             a growing share of green revenues generated by the company

We need real progress, not just pledges or commitments and it is, therefore, important to the integrity of the process that we continue to measure these key elements.

If companies meet these three principles, we consider their transition plans strong and appropriate. If they show progress over time on elements that currently are not satisfactory, that too indicates success. For the bulk of companies, the development and implementation of aligned transition plans will take years.

Nazmeera Moola is the Chief Sustainability Officer at Ninety One, an active global investment manager.