Net-Zero by 2050? What exactly does it mean for investors?

by Staff Writers,

The goal of achieving "net-zero greenhouse gas emissions by 2050" with a 45% reduction in emissions by 2030, which is essential for reducing global warming caused by the rise of carbon dioxide and other greenhouse gas emissions, is known as net zero. Many industry groups, including some for banks and asset managers, have committed to achieving net zero. Each net-zero target comes with a pathway to achieve it, including replacing coal, gas, and oil-fired power with renewable energy sources like wind or solar and capturing carbon and other greenhouse gases to compensate for remaining emissions.

World leaders agreed to limit global warming to well below 2.0 degrees Celsius and preferably at 1.5 degrees Celsius compared to pre-industrial levels, as set in the 2015 Paris Agreement, by adopting goals to hit net-zero emissions by 2050. However, it's important to be wary of company commitments. Many CEOs commit to net zero, for instance, 27 years into the future, and according to Adam Fleck, the director of ESG equity research for Morningstar, company commitments don't guarantee success or action. This makes it important for investors to understand what net zero means, considering companies' wide range of long-term and interim commitments.

Investors need to understand the risks and opportunities associated with net zero, such as the risks of emissions rising with the increasing focus on net zero and related regulations, carbon pricing, trade systems, and employee retention. Fleck emphasizes that investors paying attention is key.

Corporate commitments to net zero will become increasingly important to investors who want to see companies taking action to address climate change, says Morningstar's Jon Hale. Hale expects net zero to become an important criterion for sustainable funds. Opportunities arise from the move to lower carbon emissions, such as in clean energy funds and funds that focus on renewable energy, electric vehicles, and battery technology. Risks come with potential rewards, and investors should keep this in mind.

In addition to net zero, investors may come across other climate jargon such as scope 3 emissions, science-based targets, and carbon offsets. Scope 3 emissions refer to those emissions that a company is indirectly responsible for up and down its chain of operations. Science-based targets are targets that companies adopt in line with the Paris Agreement's goal of keeping global warming below 2.0 degrees Celsius. Carbon offsets are actions taken by emitters to compensate for their emissions.

Finally, policymakers will increasingly align policies with the net-zero goal, which will have an impact on the values of stocks and directly affect investors, says Fleck.


Source: Morningstar

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