Check out this series of blogs for more information and detail on net-zero investments.
‘Net-zero by 2050 or sooner’ is fast becoming the sustainability goal of choice for many NGOs, companies, and governments. Many of these organisations have publicly committed to lowering their greenhouse gas emissions to sustainable levels. But this is not an easy goal to track. Unlike financial transparency, carbon transparency is not as strictly regulated and therefore accurate information is not always readily available.
Furthermore, the interconnected nature of the modern economy means that a company’s emissions are not just their direct emission from a factory or office, but also from indirect emissions such as their supply chain, electricity provider, or from the use of their product by customers. So although an individual firm might be able to directly measure/estimate its own emissions, the emissions of its suppliers or customers is much more difficult to track.
These complexities can make it difficult to evaluate how close a company truly is to becoming net-zero. This can be an issue for many individual investors who want to make targeted green investments. As we have discussed previously, net-zero by 2050 (or sooner) is a clear and communicable goal by which to judge how green a company is, and something which fund managers can use to evaluate companies. But how can this same analysis be performed by individual investors?
Although many large companies have signed commitments to meet net-zero by 2050 (or sooner) goals, the issue remains that few can reliably prove that they are on the path to net-zero. So how can an individual investor select suitably net-zero investments without all available data?
Sector Investing: Focusing On Net-Zero Industries
One available tactic to evaluate net-zero investments is to focus on sectors which will need to exist in 2050 to create a net-zero world. Assuming human behaviour and consumer demand is relatively similar to today then there are a host of industries that could be classified as having net-zero potential today.
From the information found in these reports we know that, for example, oil and gas consumption will have to completely phased out by 2050 . And that in the UK renewable energy will have to increase four-fold from 2020 levels.
Pure-Play Net-Zero Companies
Taking renewable energy manufacturers as an example, there are a host of companies, which could be seen as potential renewable investments.
Unfortunately, not every renewable energy manufacturer is a ‘pure-play’ company . That is, it just focuses on one specific industry. Many renewables manufacturers are conglomerates, which also build fossil fuel infrastructure.
For example, GE Renewables are the 4th largest manufacturer of wind turbines in the world  as well as a large manufacturer of hydroelectric and solar power equipment. However, you can only invest in the wider General Electric (GE) conglomerate, who also produce jet engines, equipment for coal fired power stations, and own a large share of an oil field serving company – all of which are definitely not net-zero industries.
Examples of pure-play renewable companies include Vestas A/S and Siemens Gamesa Renewable Energy SA, who both produce and service wind turbines only. They are also both direct competitors to GE Renewables, and the 1st and 2nd largest wind turbine manufacturers in the word respectively .
Double Check Their Carbon Transparency and Climate Commitments
Due to the nature of global supply chains even pure-play renewable investments are not going to be emissions free yet. In the wind turbine manufacturing example, there are still many sources of emissions: the wind turbine manufacturing process; employee commuting; employee business travel; manufacture of the steel; and installation of the turbines. So it is still important to ensure that the companies have net-zero goals.
You can dig a bit further and look at the company’s sustainability or greenhouse gas reports [5, 6]. However, the company’s sustainability performance is not always immediately apparent from the numbers presented in these reports. In general, a company’s scope 1, 2, and 3 emissions give an indication of their emissions by in isolation these figures are difficult to rationalise. A blog on scope 1, 2, and 3 emissions will be coming soon, but basically scope 1 are direct emissions, scope 2 are from the purchase of energy, and scope 3 are the emissions from the company’s value chain .
Another potential resource are organisations such as the CDP (formally known as the Carbon Disclosure Project) who collate emissions data from the company’s who voluntarily submit their climate data . The We Mean Business Coalition also has a list of companies which have signed up to climate agreements .
With all these climate commitments and promises the risk of ‘greenwashing’ is very real and it is a skill to determine who is really trying to change and who is just trying to throw you off their scent. To root out greenwashing an individual investor can also look more generally and ask:
- How easy is it to find their report into greenhouse gases?
- Do they report scope 1, 2, and 3 emissions clearly?
- Are they actively planning to be net-zero before 2050?
- Do they have a roadmap or pathway in place to achieve their goals?
Net-Zero Does Not Mean Just Traditional Carbon Intensive Industries
When we think of net-zero companies and investments, what usually comes to mind is the low or zero-carbon versions of carbon intensive industries. Oil and gas vs renewables or gasoline cars vs electric cars, for example. However, there are whole segments of the economy that are already low-carbon industries whose business fundamentals are agnostic about where their energy or materials come from.
For example, the use of fossil fuels by internet and eCommerce firms is not a fundamental part of their business model. They still require energy to power their data centres and transport logistics, but they could feasibly switch to renewable electricity and electric cars without major changes to the products and services they offer customers [10, 11].
Other sectors which could come under the energy agnostic umbrella include creative industries, healthcare, PR and marketing, telecoms. As long as these firms have credible net-zero plans, measuring their greenhouse gas emissions and are actively working towards those goals, then they could easily be considered net-zero investments.
In a global interconnected world it is very hard for any single company to be able to currently reduce all of its emissions to net-zero. No company exists in isolation. The interconnected web of suppliers and customers means that carbon emissions are everywhere. Follow the web far enough you will always come across some carbon emissions.
In an ideal world companies would make their current and historic greenhouse gas emissions easily available. Investors would then be able to quickly see if the company was continually cutting its emissions. Furthermore, the company’s current and historic emissions targets could be compared to this data. However, we’re not there yet.
In the meantime, ‘sector investing’ can help investors narrow down industrial sectors and sub-sectors to find groups of companies which will be needed for the net-zero transition or existing low-carbon companies. Furthermore, investors can increase their confidence in the net-zero credentials of a company by finding ‘pure-play’ net-zero companies as well as double checking their carbon transparency and climate commitments. Whilst this isn’t an ideal situation yet, ‘sector investing’ can offer a meaningful way to start investigating net-zero businesses.