What does delivering a net zero investment portfolio actually entail?

Perils of merging science, social policy and company interests

How difficult is it to achieve a net zero investment portfolio? On the face of it, the trend is favourable.

BlackRock's CEO Larry Fink has warned companies they face increased scrutiny of their carbon-cutting plans, and US President Joe Biden has outlined $2trn of commitments in support of climate action at a time when thousands of businesses and scores of national governments are unveiling net zero strategies.

The EU is pushing ahead with its broader plans for a more sustainable finance sector, while it and other G20 members, including China, are already committed to bolstering financial stability in the face of escalating climate impacts, primarily through the widespread adoption of corporate climate risk reporting in line with the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations.

The investment industry has responded with hundreds of banks, asset managers, and pension firms around the world unveiling ambitious new targets in recent months that commit them to both decarbonising their own operations and delivering net zero emissions across their own portfolios by mid-century at the latest.

Organisations such as the Net Zero Asset Managers Initiative and the UN-convened Net Zero Asset Owner Alliance already boast memberships that manage or own trillions of dollars of assets, and they are still growing fast.

Unweaving a tangled web

However, setting a net zero portfolio goal is the easy part. For various stakeholders - policymakers, investors, insurers, the man or woman on the street - the simple question of how to deliver on that promise leads to all manner of challenging answers.

Consider, for example, the news in February that German energy provider RWE is suing the Dutch government through the International Centre for Settlement of Investment Disputes seeking compensation for the decision to phase out use of coal in the Netherlands.

RWE has criticised the Dutch legislation, comparing it to similar German legislation, where operators of coal power stations are being given billions of euros to avoid similar legal action, according to one Reuters report on the matter.

But this is where things get complicated for investors. Back in 2019, the Financial Times was reporting on RWE's pledge to go carbon neutral "by 2040". Before that, in 2018, Greenpeace was urging Norway's Government Pension Fund Global to ditch RWE because of its reliance on coal.

The fact that a sovereign wealth fund founded on oil wealth is petitioned to ditch a holding in a company using coal to generate energy, which has committed to cutting its emissions to 'neutral' but is in turn suing a national government seeking to stop coal use as part of its legal obligations under the Paris Agreement, illustrates the complex nature of transitioning to a net zero world.

Moreover, it indicates how there can be reasons why, seen from the outside, the actions of companies in response to climate change related risks may be seen as contradicting to their commitments to net zero.

Staying with the example of energy companies, consider the findings of the Transition Pathway Initiative's (TPI) review of 132 of the world's largest publicly listed energy companies.

As recently as 2019, it suggested that "only 20% of companies explicitly acknowledge the need for net global CO₂ emissions to reach zero in order to stop global temperatures from rising.

Most importantly, only 13 companies out of 132 had made net zero commitments in relation to their own emissions at the time of the analysis".