- The climate revolution is now well underway.
- Clean technologies created $1 trillion of value for investors in 2020.
- By committing to net zero carbon, investors can accelerate the decarbonization of the global economy.
Through the unfathomable toll of lives lost and businesses and jobs destroyed, one could be forgiven for missing a positive inflection point during the pandemic: the climate revolution is now fully underway.
Governments around the world – including some of the largest emitters such as China, Europe and the US, which rejoined the Paris Agreement in February – have stepped up their net zero carbon commitments. In fact, countries representing more than half of the global economy have gone beyond the goals set in Paris and are now bound by commitments to reach net-zero greenhouse gas (GHG) emissions by the middle of the century. With the US and other countries preparing net-zero pledges for COP26, which will be held in Glasgow in October, more than three-quarters of the world economy could be on track for full decarbonization by mid-century. This collective action would make the Paris Agreement goal of keeping global warming well below 2˚C achievable.
The perks of net zero carbon investment strategies
As investors, we are making our own commitments to reach net zero emissions in our portfolios. We do so not only because of the climate emergency but also after considering the incredible investment opportunities offered by a decarbonized global economy. In 2020 alone, the market capitalization of clean technology companies increased by nearly $1 trillion, while the market capitalization of oil and gas companies declined by roughly $680 billion. Those numbers are on the scale of previous technology transitions such as the rise of the internet economy in the 1990s and of the smartphone ecosystem a decade ago. We are now seeing an acceleration of new capital invested into clean technologies which foreshadows even greater value realizations in the future.
A growing body of evidence shows that investment strategies that focus on companies with high sustainability performance – such as those with lower GHG emissions, diverse executive teams and well-paid employees – will do better in the long run than companies that are managed for the short-term, with little regard for negative externalities. By doing the right thing for climate and the environment, we are doing the right thing for our clients, our colleagues, and our communities.
As our portfolio companies embark on their net zero carbon journeys, we will encourage them to procure 100% of their energy needs from renewable sources. Globally, solar and wind are now the cheapest forms of energy available, which means companies can reduce emissions while improving their bottom line. The Biden administration has committed to a 100% carbon-free grid by 2035, while nearly 300 global companies have made similar commitments through the RE 100 initiative. Sourcing the world’s primary energy needs entirely from renewable sources is fast becoming a reality.
Electric transportation is also becoming the new standard, with many countries committing to ending the sale of internal combustion engine vehicles in the coming decade. Following this trend, GM recently announced that it will only sell net zero emission vehicles by 2035, while Volvo will do so by 2030. By procuring renewable energy and electric vehicles, our portfolio companies can help address nearly two-thirds of global emissions. Addressing other emissions in their supply chain, travel and industrial operations will allow them to reach net zero carbon.
One sector where we will not be spending time is oil and gas. If GM’s announcement, the increasing numbers of Teslas on the road, and oil prices going negative didn’t convince you, consider Texas, home of the hydrocarbon industry, where more than 95% of planned electricity grid additions are renewable. Contrary to claims of renewables being the root cause of Texas’ recent grid collapse, in reality, distributed solar and storage facilities would help to address any repeat occurrences. As we witnessed in Puerto Rico after Hurricane Maria, while centralized gas and coal plants are hit hard by natural disasters, leading to grid interruption, distributed renewables provide reliance. In other emissions-intensive sectors such as steel, cement, shipping, agriculture and aviation, we will push for companies to disclose their carbon emissions and adopt science-based targets and plans for reducing emissions in line with the Paris Agreement. These net zero carbon plans must have near-term milestones that make companies accountable for their commitments.
We do not take this pledge alone. With the support of the sustainability nonprofit Ceres and other investor organizations around the globe, dozens of asset managers representing $9 trillion of assets under management are joining forces in the Net Zero Asset Managers initiative. The commitment is to reach net zero carbon by 2050 or sooner.
Our two firms would like to up the ante, and meet this challenge by 2040 or earlier. We will report on our progress with transparency and encourage accountability and debate on our performance. By decarbonizing our portfolios faster, we can capture the most attractive investment opportunities presented by the clean economy while launching the next wave of sustainable jobs.
We are encouraged to see some large banks commit to net zero by 2050. Unfortunately, these same banks have provided over $3.8 trillion in financing for fossil fuels since the Paris Agreement. This trend must stop for the sake of both climate progress and their ongoing financial viability. 2050 is too far away from the perspective of executives in charge today to be a meaningful target. Change must happen in the coming months and years, with thousands of companies placed on a solid track toward net zero carbon. We believe that initiatives such as Climate Action 100+ and the World Economic Forum’s Mission Possible, which engage some of the world’s heaviest emitters, and Say on Climate, which seeks to pass climate resolutions at all publicly listed companies, merit broad support.
We are witnessing trillion-dollar, system-wide commitments to net zero carbon. The Biden administration recommitting the US to the Paris Agreement, and its plans to enact bold new policies for helping investors and companies reduce their emissions while expanding clean energy jobs and investment opportunities, are important steps in the right direction. But governments around the world must raise the bar further, stop subsidizing fossil fuels, and establish clear financial market regulation in line with the Paris Agreement. As investors, we will do our part as well.