As governments translate their “net-zero by 2050” pledges into regulations and consumers back away from companies they associate with polar bears drowning, financial advisors are going to come under increased pressure to use net-zero as an investment criteria, said analysts at Columbia Threadneedle.
But the most important reason for advisors to get on board, and early, is a completely different reason altogether.
“It’s not just because we’re doing the ‘right thing,’ or because regulators are coming out with some rules,” said Melda Mergen, the firm's global head of equities, at a recent webinar. “It’s because this is really where the capital is moving to. It’s about how companies are thinking about their future.”
According to Natalia Luna, senior thematic analyst in responsible investment, the business environment is going to be very different in the next five to 10 years as companies address the net-zero challenge either as a provider of new technologies or a user of new technologies.
“Net-zero is not a distant target to achieve by 2050, it actually requires we cut emissions by 50% in the next eight years,” she said.
With that 2030 reality in mind, the global investment company has developed its own proprietary scoring to understand both company-level risk and opportunities for investment as the world attempts to eliminate net emissions in order to keep global temperatures from rising more than 2.7 degrees Fahrenheit above pre-industrial levels.
In order for that to happen, total emissions for the four most polluting sectors—power, transport, industry and buildings—will have to drop by 90% by 2050. Among those, power alone will have to be fully net-zero by 2035.
“All this is going to cost money,” Luna said, adding that new technologies will have to evolve to make it possible across all sectors. She said the drivers in this goal of net-zero are countries and customers putting pressure on corporations and the investment industry.
It’s that last piece, the Columbia Threadneedle piece, where clients are asking to see evidence that their investment portfolios have been “decarbonized,” meaning the investments themselves represent net-zero along a timeline of a 5% to 7% decline in emissions each year, she said, adding that it’s not going to be easy to get to.
“For some perspective, in 2020, the year of the pandemic when we saw lockdowns and economic activity stop, global emissions declined about 4.5%,” she illustrated. “So an annual decline of around 5% or 7% in order to achieve net-zero shows you the magnitude of this change.”