The Paris Agreement recommended to limit global temperature rise to an average of 1.5^oC above pre-industrial times by 2100. Meeting that goal requires drastically decarbonising the global economy toward net-zero by 2050. However, current commitments are not enough to achieve the Agreement goal, despite the growth of green technologies. Investors therefore, have a key role to play in accelerating the process, hence the rise of net-zero investing.

Net-zero means global carbon emissions from human activities are in balance with emission reductions. At net-zero, emissions are in equal amount of offset carbon from the atmosphere, resulting in zero increase in net emissions. Net-zero investing consists of implementing decarbonisation pathways for both portfolios and broader economy to achieve at the end, a global warming scenario of 1.5^oC.

There are four approaches in net-zero investing that effectively impact the green economy’s process: (1) shifting capital from more-carbon-intensive to less-carbon-intensive investments, to influence companies’ share price, capital cost and access-to-capital; (2) engaging with financial issuers directly, through shareholders’ voting or other stewardship activities to spur faster decarbonisation among laggards; (3) directing investments toward low or zero-carbon engineering; and (4) policy advocacy for changes that affect the market, and eliminate free-rider issues relating to the market’s failure in pricing carbon emissions.

To achieve consistent decarbonisation, synchronised shift of capital and engagement in renewable engineering, a top-down approach is needed. Asset managers should further support investors with net-zero portfolio engineering methodologies, climate risk management, reporting services, and stewardship. From a portfolio construction perspective, decarbonisation could be implemented in the following ways:

• Tilting toward low emitters: this leads to more green portfolios in the long-term.

• Rebalancing toward decarbonisation leaders: this requires a forward-looking assessment of companies’ rate of decarbonisation and a sufficiently large universe of emission-reducing companies.

• Designing a combined approach: this helps investors to achieve consistent decarbonisation rates and mitigate the risk of crowding in less-carbon-intensive assets.

Nonetheless, a more consistent and coordinated portfolio investors’ effort across all levels is required to accelerate the necessary change for achieving the net-zero goal by 2050.

This article is contributed by Ir Dr Alex Gbaguidi with the coordination of the Environmental Division.