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.

Have companies got their act together?

Since then more energy majors have come forward with net zero targets, but have their long-term investment strategies changed that much?

The latest TPI report this month warns that despite net zero pledges from a growing band of the oil and gas majors the industry will need to scale back investment in new fossil fuel infrastructure much faster than currently planned if warming is to be limited to 1.5^oC.

"Gas consumption, considered by the industry to be a "growth engine", must begin to decline by 2030," the report concluded.

"Most European oil and gas companies have responded to investor pressure by updating their emission targets, describing them as being consistent with Net Zero. Research shows that this is not the case… oil and gas companies will have to go much further to genuinely claim 1.5^oC/Net Zero alignment.

"For most, this is likely to require a substantial scaling back of investment in exploration and production activities, particularly for oil."

Such a change would clearly have implications for portfolio managers. BP and Shell are key FTSE 100 oil and gas stocks as of the December 2020 index rebalancing. But so too are companies linked to coal mining, such as Anglo America, BHB and Glencore.

Many of the world's most carbon intensive companies have responded to concerns about their long-term viability in a decarbonising world by announcing new net zero goals, but questions remain about the credibility of their climate strategies.

Meanwhile, despite the surge in the number of companies setting net zero targets they remain in the minority on most of the world's top exchanges.

According to the South Pole report Crossing the Line to Zero: The state of Net Zero Commitments - which included research into the views of executives who attended the first Net Zero Festival in October 2020 - 35% of FTSE 100 constituents had committed to net zero, 34% had committed to or set a science-based target (SBT), while 21% had both a net zero target and had set or committed to setting an SBT.

It is an encouraging level of engagement with the net zero transition, but it is far from universal. For argument's sake, if the FTSE 100 represents market capitalisation of around £2trn, then that is a significant level of equity assets at risk because of lack of commitment.

Metrics battle

The task becomes more confusing still when you consider there is not yet an agreed definition of what a net zero portfolio should be.

As Bloomberg reported in February, former bank of England and COP26 adviser Mark Carney recently left experts "confounded" when he argued that Brookfield Asset Management, the investor at which he is vice chair, had a net zero portfolio despite holding substantial oil and gas assets.

"The reason we're net zero is that we have this enormous renewables business," Carney explained at a recent event, adding that "all the avoided emissions that come with that" compensated for the firm's polluting interests.

The argument prompted an angry response from environmental campaigners and some investment experts, who insist a much more robust definition of what constitutes a net zero emission portfolio is required, under which avoided emissions would be strictly verboten.