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.”

The most important change will be transforming the global economy from one using predominantly fossil fuels to one using various forms of renewable energy, which will require an investment of some $5 trillion annually through 2030, which is double current rates, and then falling to $4.5 trillion annually through 2050.

To score sectors and companies on their capacity to embrace the challenges of the net-zero pledge, Columbia Threadneedle analysts looked at two primary areas—compliance or regulatory costs, and the earnings, risks and opportunities associated with decarbonization—and six metrics: carbon cost as a percentage of revenue; how easily a carbon cost can be passed onto customers; any other emissions taxes or credits; impact to existing revenue; new earnings sources; and decarbonization costs, said Meg O’Connor, a senior equity analyst at the firm..

“Our sector experts analyzed the impact of net-zero commitments on the securities that they covered. They also assessed valuation impact, and existence of a net-zero target at the company level,” she said, adding that the spotlight was thrown on more than 2,000 companies in the U.S. and in the European Union, and across equities, investment-grade debt and high-yield debt.

Analysis showed that 53% of companies would not be all that impacted by a net-zero transition, and 16%, including utilities, communications and financials, would gain from the shift. But 31% would take a real hit, and those included consumer staples, consumer discretionary, industrials, real estate, materials (especially chemicals, and metals and mining), and all traditional oil and gas companies.

“We are very, very excited for the opportunities that we can see. Some of these will be solutions at the industry level, where companies are going to come up with new products and new ideas,” Mergen said. “This is definitely a long-term journey, and we keep our eyes on the long-term trends. But for our clients, we need to translate this to their portfolio outcomes and their expectations about their goals, and how we’re going to meet those goals by managing their money.”