Making Net Zero count by facing up to its shortcomings

The world is increasingly committing to Net Zero emission strategies. Preventable Surprises has been supportive, but science and experience now show it won’t be enough to meet the Paris Climate Agreement and this warrants a new approach. This is because for critical sectors, the gap between Net Zero and Real Zero is too significant and relies excessively on offsets as opposed to necessary real reductions, with unproven solutions and ample space to fudge the numbers. In addition, Net Zero strategies are often long term (e.g. 2050) and do not inherently reflect the urgency of climate issues. However, we don’t need to throw the baby out with the bath water: here’s how investors can make their Net Zero commitments work.

The world has fallen in love with Net Zero

Companies, investors and governments have been following one another to commit to Net Zero emission targets.

Net Zero means that by a target date, any remaining greenhouse gas (GHG) emissions in a given country, by a company, sector or in an investment portfolio will be entirely offset by taking carbon out of the atmosphere. This includes past emissions that haven’t been offset yet. Such as strategy is meant to be consistent with the Paris climate agreement, which requires global carbon emissions to reach Net Zero by around 2050 and all GHG to reach Net Zero by around 2070.

Companies are in on the action: Microsoft and Google are two prominent corporations to have done so. At COP25, 500 B-corporations committed to Net Zero by 2030. The trend is so strong that the Energy and Climate Intelligence Unit calculated that half the world’s GDP is now rooted in places with plans (or plans to adopt) such Net Zero targets, from California to the United Kingdom, Japan or Germany, by 2050 if not before.

Among investors, asset owners have committed to a Net Zero Asset Owner Alliance, and to transition their investment portfolios to Net Zero GHG emissions by 2050. The initiative says that this demonstrates “united investor action to align portfolios with a 1.5°C scenario”. There is a five-year plan mechanism and investors will have to propose intermediary targets on a regular basis. Others, like Finnish Ilmarinen are more ambitious and aiming for Net Zero by 2035.

In practice, investors or companies can achieve Net Zero by reducing the volume of GHG emissions of their activities or portfolios, remove carbon and other gases by planting trees, reducing deforestation, and use carbon capture and storage (CCS) technologies. Some investors actually find these targets more practical than aligning with a 2 or 1.5 degree scenario, because it’s easier to measure the carbon input and outputs of a portfolio than to speculate on alignment which takes into account behaviors outside of their control or field of vision (the flipside being that cherry picking or ringfencing may leave critical parts of the economy outside of their Net Zero realm).

But major questions have emerged

Preventable Surprises has in the past been supportive of companies and investors setting Net Zero targets, following much of the scientific community. But alongside this welcome momentum, there has also been skepticism and vocal pushback: In Davos, Greta Thunberg asked companies to commit to Real Zero instead of Net Zero. Real Zero requires achieving zero emissions effectively without the help of compensation or negative emissions.

In fact, Net Zero targets are insufficient per se. Chief concerns include that 2050 Net Zero does not reflect earth’s limited remaining carbon budget, nor the urgent need to start and accelerate emission reductions (particularly in the energy sector), that it has weak policy translation, and too many uncertainties in the projections, for example with negative emission technologies.

Net and Real Zero will need to coexist

Let’s first acknowledge that in some sectors a Net Zero approach is inevitable. For example, it’s impossible to eliminate all GHG emissions in the agricultural system. They can be decreased but will need to be compensated to meet the objectives of the Paris agreement. This means that 100% Real Zero is unachievable. The same applies to steel, chemicals and aviation.

However, new research (in press) shows that a 1.5 or 2 degree scenario does require a Real Zero strategy in the energy sector. Without reliance on negative emission technologies (NETs), and assuming a rapid acceleration of the mitigation agenda, a likely change of 2 degrees requires Real Zero carbon emissions from energy by 2035 in wealthy countries, and by 2050 for poorer countries.

The most important decisions are the ones made in the next 3-5 years

Crucially, without NETs, a successful 2-degree strategy requires deep mitigation with emissions in developed countries cut by 30% by 2025 and 70% by 2030 respectively. That’s in 5 and 10 years! And in developing countries, they need to peak by 2025 and to be eliminated by 2050. This calls for immediate action, more so given the choices being made now on physical infrastructure assets will have lasting impact. This is at odds with the long term and uncertain nature of many Net Zero projections.

2050 projections are plagued with uncertainty

Indeed, many of the scientific scenarios that underpin the support for Net Zero carbon by 2050 under the Paris Agreement rely on emerging carbon capture technologies whose success and business viability are unproven across a global network of power stations. It’s long been noted that models, including from IPCC, rely on their success more than is warranted. Meanwhile, carbon that is stored in forests or soil, another negative emission strategy, is ostensibly a good idea but requires considerable care for impact on soils and species, and carbon is not permanently removed because it risks leaking back (for example when trees are chopped down for firewood or any other purpose).

Net Zero does not require emissions to be compensated as they are emitted, so long as they net out by the target year. This ‘accrual’ approach would in theory allow emissions to grow on the promise that a future generation will find the means to compensate them. It gives arguments to governments and vested interests to delay difficult decisions like implementing carbon taxes.

As a result, and despite this uncertainty, governments in countries ranging from the United States or Saudi Arabia, from Norway to the UK, are basically using the potential of NETs as an argument to continue exploiting fossil fuels. Mitigation deterrence is a real thing.

Business will play fast and loose with climate scenarios

A recent review of US utilitiesshowed inconsistencies between emission reduction scenarios (including Net Zero) and long term business plans as well as aging infrastructure relying on coal and natural gas. Research supports the notion that senior management of electric utilities are going to overpromise and underdeliver on Net Zero commitments as long as their remuneration and job security is based on extending the life of fossil fuel infrastructure. This also means analysis cannot reasonably rest on industry commitments to be credible.

Finally, and this is nothing new, the focus of business and investors on risk disclosure and scenario analysis is happening at the expense of actual emissions reductions and often serves as a stalling tactic.

Investors need to act urgently

As a result, investors with a serious interest in climate and committed to Net Zero cannot dilly-dally and expect that things will work themselves out over time. We suggest they should take steps to pro-actively and urgently move the world to Real Zero in the energy sector and other sectors where it is possible, and Net Zero otherwise. It is misguided to think of the policies as a valuable signal that the investment community “cares”. In fact, we don’t think the world needs more virtue signaling: it was enough for investors to throw their weight behind the Paris agreement, but now is the time for action.

Preventable Surprises advocates making investor commitments and actions as specific as possible, acknowledging that the more momentous decisions are being made now, and that long-term plans need to be based on realistic assumptions. Investors committed to the Net Zero Asset Owner Alliance should recognize that their first five-year plan will be the most important. And everyone should remain keenly aware that it is global absolute emissions that matter above all.

We propose a set of concrete solutions

Our thoughts on what investors should do:

• All investors committed to the Paris agreement should establish a staged strategy, including a Real Zero strategy for the energy sector, consistent with the absolute reduction targets of 30% by 2025 and 70% by 2030 in developed countries, and 2025 peak and 2050 elimination for developing countries.
  • In practice, every infrastructure investment decision from now on should be consistent with these targets. Investor should be forceful stewards and make this an absolute precondition of investments, at appropriate paces for developed and developing world respectively – regardless of political support.
  • Investors should accelerate engagement with the supply and demand (utilities) side of the energy sector, demanding – and independently verifying as needed – that companies set equally ambitious Real Zero targets, change business models when these are built exclusively on the growth of emissions, include Scope 3 emissions in their strategies, or simply return money to shareholders if they can’t transform. The largest index investors and significant active investors should take the lead with high emission sectors – with size comes responsibility.
  • Investors should not rely on corporate commitments as the basis for assessing the Net Zero (or Real Zero) alignment of their portfolios. They should file resolutions to ensure concrete implementation of any such commitments, and preemptively vote against directors when companies oppose the resolutions or try to avoid them coming to a vote.
• Investors should base and update their projections on realistic assumptions:
  • Focus first on known reduction technologies or solutions, rather than prospective ones.
  • Publish separate targets for negative emissions and for emission reductions.
  • Reflect the latest research on fossil fuel threats to climate change, for example as regards methane emissions, whether or not these findings are part of IPCC.
  • Be transparent about the uncertainty that underpin their emission assumptions by publishing a risk/probability rating for their scenario base so that stakeholders can better assess them.
  • Remember that such projections are only useful to the extent that investors actively use them when engaging with companies and governments (see also the 2 Degree Initiative’s call for evidence of impact by investors).
• Investors should take this message to policymakers ahead of COP26. Recognizing that individual corporate action is a necessary but insufficient solution to the systemic risk represented by climate change, investors should also seek to influence the overarching policy context.

The movement for Net Zero may be progress on the part of the private sector and finance, but we have a duty to understand its limitations in order to keep warming under two degrees. We welcome feedback and other ideas on how investors can improve their Net Zero strategies.