Market view and Insights
More and more companies commit publicly to net zero. What does the pledge mean? And how is being "net zero" even doable?
For anyone who was inclined to keep track of such things, it has been a dizzying couple of years. Big businesses have lined up to commit to reducing their impact on the environment by announcing the hottest three words in corporate life right now: net zero pledge.
Globally, corporate commitments to cut emissions to net zero tripled in 2020 to more than 1,500 - a significant undertaking that signals the private sector’s potential role in tackling the climate crisis. But it’s a trend that also invites scrutiny. The big question: what does a net zero pledge actually mean?
It’s important to note that "net zero" is a long way from "absolute zero". For a company to achieve a net zero pledge it must remove as much carbon from the atmosphere as it adds to it. The most effective way to do this is to reduce emissions - from commuting, business travel and buildings, for example. "We will always have some CO2 emissions," Ursula Finsterwald, LGT's head of group sustainability management, says.
Ursula Finsterwald says the adoption of such pledges gained speed in 2015 when the world signed the Paris Agreement and committed to global net zero emissions by 2050. The agreement’s goal was to limit global warming to below 2, preferably to 1.5 degrees Celsius, when compared to pre-industrial levels. Zero-carbon solutions should also be "competitive in sectors representing over 70 percent of global emissions", said the agreement, which was enacted in 2016.
"I think the past year the pressure has been rising enormously and we’ll see much more of this, especially now that everyone is working towards COP26," Finsterwald says. The UN Climate Change Conference, which is due to be held in Glasgow this November, plans to speed up action towards hitting the targets set in Paris.
She says LGT looks at three things when thinking about its own pledge. Emissions from operations were dominated, pre-Covid, by business travel. To balance these, the company takes part in renewable energy, reforestation and regenerative agriculture projects - an approach to farming that boosts sustainability and the resilience of land to climate change.
Part of the broader approach also includes investing in new technologies and projects that will more efficiently and effectively balance emissions, such as carbon capture and storage.
Companies with pledges that undertake this kind of work receive a removal certificate. These are digital tradable assets that confirm how many tonnes of CO2 have been absorbed and stored in a carbon net-negative product. Companies such as South Pole issue such credits.
But Finsterwald says the biggest challenge in achieving net zero, beyond reducing and balancing the impact of operations, is in achieving net zero in investments, a pledge LGT has also set out to achieve by 2030. "Business travel is our biggest emitter because we are an international bank but investment in CO2 intensive sectors would be far far bigger," she says.
"If you invest in the cement sector, for example, and have shares in a company your CO2 emissions just explode." It’s the same for fossil fuels. Knowing how costly such investments might be involves a smart approach to gathering data. "So we want to know what emissions there are from the mortgages we give clients - what is the energy use of that house we give the loan for," she explains.
Companies are increasingly facing criticism for making net zero pledges while continuing to invest in oil companies, for example. "Fossil fuels need to be part of the transition because the world still depends on them," Finsterwald says. "We want to be part of the transition and that means only investing in the companies that also want to be part of it. You have to look at their investing plans and move to renewable energy."
There is of course the risk of greenwashing when less progressive businesses find ways to make pledges while also looking for loopholes. Finsterwald supports better regulation of the removal certificate industry, for example, as a way to make commitments real.
But, as with all things environmental, the biggest push towards a greener future is coming at the level of the bottom line. We are close to a tipping point at which avoiding such pledges - and the transparency required to make them genuine - threatens not just the environment but profits..
Recent research in the US showed this effect was taking hold even in the dirtiest industries: energy, utilities and industrials, which make up less than 15% of the S&P 500’s market value yet 70% of emissions, according to Bank of America. Companies within those sectors that had net zero pledges had significantly higher predicted valuations than those without a pledge. “It pays to set a date,” Bank of America concluded.
In many sectors, licenses to do any business will begin to depend on transparent pledges. "The world is turning so fast in terms of what good business looks like," Finsterwald says. "I do think it will look very different in ten years. It will become unprofitable to not be sustainable because nobody wants that anymore."
LGT aims to reduce net emissions from its operations and investments to zero by 2030. With this step, LGT is once again underscoring its commitment to the Paris Agreement and a sustainable financial sector.