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.

The data that warned the world would shoot past the 1.5^oC target unless net zero emissions are achieved by 2050 has caused a significant shift in terms of how to converse about carbon and climate change.

It means, for example, that oil companies are under much more pressure to address responsibilities under Scope 3 than they were previously, Lewis suggests. With 2050 now just 30 years away, they need to start saying how they will get there.

"Like any long-term goal, you need interim milestones, to say how you are going to measure yourself, and allow third parties, investors, governments, society, to hold you to account," Lewis reflects.

As investors start to disclose what proportion of their assets are aligned to net zero, and how much is expected to be aligned by 2030, it will put increasing pressure on companies in which they invest to publish their own interim targets. Defining pathways and ensuring accountability will be key, Lewis suggests.

Science-based credibility

Iselin Aslakstrom, responsible investment officer at Fulcrum Asset Management, notes Net Zero pledges are important in setting the tone for where companies want to go. But, like others, she stresses that any pledge need underpinning with a strategy setting out how it will be achieved.

A science-based approach is arguably the best-in-class way to provide that clarity. It forces companies to outline how they will decarbonise and within which particular sectors.

It also gives credibility to any target. Without setting a science-based target, any pledge will instead speak to ambitions rather than how to actually get there, Aslakstrom says.

In the investment industry, it is only relatively recently that institutions have been setting such science-based targets, she adds.

Net Zero by 2050 and a 1.5^oC temperature rise by the end of the century are targets based on science. It may not be perfect science, but if an asset owner sets these targets, at some point they will really need to set out how they will achieve it.

Meanwhile, investors also need to beware that decarbonising portfolios does not necessarily decarbonise the economy. The asset management industry can encourage decarbonisation, can direct capital to incentivise and modify behaviour, but investors can only do this if they know the facts themselves.

Metrics such as the implied temperature rise (ITR) can give a clearer idea if companies are decarbonising quickly enough, or whether they require lots of engagement. Just having a low carbon portfolio is not enough; investors need to know the role they are playing in driving economy-wide change.

Pooja Khosla, vice president, client development at Entelligent, notes that as such improvements may need to be made to the frequency at which companies report their Scope 1, 2, and 3 data.

Third-party data providers need to put some pressure on this area, or else there is a risk that companies simply are given more time to make pledges without sufficient accountability. Standardisation in carbon accounting will help with this, she argues, although there also needs to be a mechanism allowing for discounting for differences between the most and least developed parts of the world - in mind of the need for emerging markets to maintain GDP growth.