'Net-zero emissions': why it can be misleading for investors

You’ve probably been hearing a lot in the news about countries and companies committing to ‘net-zero’ carbon emissions. President Xi Xingping for example has committed China net-zero emissions by 2060 while US President Joe Biden, has recently committed the USA to achieve net-zero by 2050. In Australia, Prime Minister Scott Morrison seems close to setting a net-zero target too, along with countless other leaders.


A recent analysis shows the ‘net-zero’ momentum has surged, with over two-thirds of the world’s economy committing to net-zero emissions. The world is moving towards net-zero. But what does it mean scientifically and practically at the company level? and how does that translate to investment risk? We explore those questions this week…


What does ‘net-zero’ mean?


The scientific definition

The Intergovernmental Panel on Climate Change (IPCC) defines net-zero as the point when:

anthropogenic emissions of greenhouse gases to the atmosphere are balanced by anthropogenic removals over a specified period.

‘Anthropogenic’ means human-caused and the ‘specified period’ is typically on an annual basis, but this can be longer as we will find out.


So ‘net-zero’ emissions simply mean that over a year, humans do not incrementally add carbon dioxide to the atmosphere. Any human-caused carbon emissions must be compensated by negative human-induced carbon emissions (otherwise known as carbon sinks).


Carbon neutral electricity isn’t enough to reach net-zero. If for example, we converted all the world’s electricity to renewable energy, the atmospheric loading of CO2 will still increase because of emissions from industry, agriculture, and transport. To reach net-zero would still require negative emissions that sucked carbon from the atmosphere.


When does the world need to reach ‘net-zero’?


In late 2018, the Inter-governmental Panel on Climate Change (IPCC) published a special report looking at what the world needs to do in order to give us a chance of limiting climate warming by 1.5°C beyond pre-industrial times. The take-home was that the world must halve carbon emissions by around 2030 and reach net-zero emissions by mid-century.



For a 2°C warming limit, the take-home was that the world must reduce carbon emissions by around 25% by 2030 and reach net-zero emissions by 2070-20801. The net-zero timeline is pushed out by ~20years under the 2°C scenario.


So what does ‘Net-zero’ for companies mean?


On a scientific basis, ‘net-zero’ is pretty clear, and this definition equally applies at the company level. That is, a ‘net-zero’ company is defined as one that does not incrementally add carbon dioxide to the atmosphere over one year. Any carbon emissions that do occur must be negated by removal from carbon sinks (like large-scale forestation, biochar, BECCS (bioenergy with carbon capture and storage), DACCS (direct air capture and carbon storage), and enhanced weathering).


Caution needed over net-zero claims


There are some important questions each of us should consider around ‘net-zero’ claims from companies.


What emissions aren’t included?


The challenge for companies and investors alike is that unfortunately, there is no commonly agreed definition of what constitutes net-zero emissions for companies - so companies can claim net-zero status even when they aren’t. For example, Facebook recently announced it ‘has reached net-zero’2, but reading the details, the company only accounts for emissions from their data centers and electricity, not their supply-chain or customer usage (they plan for those emissions to be net-zero by 2030).


For some companies, the upstream and downstream emissions (known as Scope 3 emissions) can dwarf any other emissions. And they can have a big impact on translating the carbon financial risk for individual companies.


Hundreds of companies from JBS, the world’s biggest meat company, to BHP, the world’s biggest mining company are pledging to be net-zero. Each company can choose to include or exclude Scope 3 emissions. Those details are very important as they can have a big impact on translating the carbon financial risk for individual companies. At Emmi, when Scope 3 emissions aren’t reported, we’ve built in-house models to estimate those for any company. This allows us to take a consistent approach across thousands of companies.


What are your 2030 targets?


As the race to claim net-zero status grows, the time horizon is often not very meaningful for investors. Company targets to 2050 for example, can easily be avoided given the average tenure of executives is around 5 years. If a company has material carbon risk, it’s the next 5-10 years where the big decisions and gains need to be made.


At Emmi, we focus on assessing carbon risk as of today and then calculate scenarios needed for the company to meet over the next 5-10 years in order to align with carbon risk bands. Like a credit rating, Emmi allows investors to understand how companies are tracking across all sectors on time horizons that suit.


Does the company have a financial carbon risk in the first place?


From a financial perspective, it’s important to assess whether a company has a material carbon risk anyway? Do they need to act on carbon emissions in the first place?


All the global technology giants including Google, Amazon, Microsoft, and Facebook have announced big ambitious plans to be net-zero in the near future. Some like Google, even go a step further and have claimed to become net-zero across the entire history of their company3. Microsoft wants to beat them and go ‘Carbon Negative’4. That is, they want to take more carbon from the atmosphere since the beginning of their business.


The tech giants are in a race to eliminate carbon risk for their businesses. The thing is, they were already very low carbon risk from a financial risk perspective. Facebook, Microsoft, and Alphabet all received near the highest Emmi Score possible (99/100) - meaning they are the lowest possible financial risk on carbon.


Facebook as an example, can actually INCREASE emissions by 60% and still be aligned with a net-zero 1.5°C climate (see below). The green area is low carbon risk over the next 10 years.


Facebook Inc: Carbon Risk Profile from Emmi

Emissions changes needed for Facebook by 2030

What companies are currently aligned with a net-zero 1.5°C climate?


Our approach at Emmi is to combine the latest carbon data with company finances to allow investors to understand the carbon risk of any company. We’ve built scenarios that allow us to quantify what companies are aligned with a net-zero today and those that are not.


Under the net-zero carbon constraint aligned with a 1.5°C climate warming scenario, we have analyzed over 2900+ companies worldwide to understand who is already on track and doesn’t need to achieve emission cuts over the next 5-10 years. The results may surprise you but we have found that 36% of the world’s largest publically-listed companies don’t need to reduce emissions (like the Facebook example above) - they are already aligned with a net-zero 1.5°C world.



However, different sectors and countries have very different carbon exposures. For the ASX100 as an example - we find only 13% of the companies are aligned with a net-zero 1.5°C world.


Net-zero claims in the media can be misleading. You can take the guessing out of it by using Emmi. If you want to learn more and get a free 1-month trial to the full suite of tools on the Emmi platform - hit reply from your email or you can contact us here.


If you have any thoughts on today’s post or would like to suggest topics for me to investigate in future newsletters - feel free to subscribe and comment below.


Ben


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