team in boardroom showing charts on How Investor Net-Zero Commitments Impact Businesses

How Will Investor Net-Zero Commitments Impact Businesses?

January 11, 2022

The Business Impact of Net-Zero Investing

In September 2021, right before the UN Climate Change Conference (COP26), a record 587 investors with US$46 trillion in assets under management urged governments to rapidly implement five priority policy actions that would allow them to invest and allocate the trillions needed to respond to global warming effectively.

The investors called on countries to strengthen their Nationally Determined Contributions (NDCs) for 2030. They also asked countries to commit to mid-century net-zero emissions targets within their own borders and to put in place mandatory climate risk disclosure requirements aligned with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). These demands illustrate how investors are ramping up the pressure on governments to create the structures and put in place the policies that will enable them to invest in line with a net-zero transition. 

Many financial institutions are crying out for more net-zero investment opportunities. The Net Zero Asset Managers Initiative alone has 220 signatories with US$57 trillion in assets under management, for example. Such initiatives have corralled institutions to take climate action, but need supportive governments to achieve their aims. Similarly, governments need net-zero financial institutions to help them reach their national emissions reduction pledges.

Financial institutions of different kinds also have to align their practices with one another to fulfill their net-zero promises. For example, net-zero asset owners — including pension funds and endowments — have to ensure the asset managers they hire to invest on their behalf do so in line with their own climate goals.

Doing so does not just make good climate sense. It makes good investment sense, too. Since government regulations and market trends alike are now bending in the direction of net-zero, those companies that fail to transition to a low-carbon model will find themselves swimming against the tide, and lose value as a result.

What Does The Net-Zero Emissions Target Mean For Business?

Achieving net-zero emissions by 2050 worldwide is essential if the planet is to keep global warming from exceeding 2°C. For businesses, in practice, this target requires them to halve their net emissions by 2030 — eight short years from now. 

Many financial institutions are already scrutinizing their portfolio companies to determine whether and how they are operationalizing net zero. Therefore businesses contemplating their own net-zero transitions should go over the details of their top investors’ and creditors’ net-zero targets and work out how to bring themselves into alignment with these. They should also pay attention to their investors’ interim targets, which should set the pace for their own transition planning.

Even when an investor does not have an explicit net-zero target for specific economic sectors, businesses operating in such sectors should not be complacent. After all, such sectors could still face market, regulatory, and investor pressure to move to net zero in the future.

How To Transition Into A Net-Zero Business Effectively

For a business to succeed in a net-zero world, it not only has to cut its own emissions. It also has to add value to the net-zero economy.

Take the automotive sector as an example. For a car manufacturer to remain viable in a net-zero world, it has to cut the emissions associated with its activities. However, to truly excel it also has to capitalize on the climate opportunities afforded by the net-zero transition — namely, by powering the electric vehicle revolution. An automotive business that neglects this climate opportunity will struggle for relevance in a net-zero world.

Already, those companies that have taken rapid steps towards net-zero are being crowned as sector leaders. Take the example of Siemens Gamesa, which is leading the world in the manufacture of wind turbines. Those companies that do not innovate to future-proof their businesses will find themselves passed over by net-zero financial institutions and starved of funding in the years to come.

Pitfalls to Avoid on Your Net-Zero Journey

Businesses should be aware of pitfalls on their journeys to net zero. In particular, they should tread very carefully around the use of carbon offsets as a way to trim their net carbon emissions.

Not only is the carbon offset market volatile at times, which could hurt a company’s bottom line, there simply are not enough credible offsets available to cancel out current emissions, according to a recent Oxfam report. That’s before getting into the questions around the legitimacy of certain offsets, and reputational issues that can arise from the administration of certain offset programs. Financial institutions also may not look favorably on those portfolio companies that overly rely on carbon offsets to achieve their net-zero transition goals.

How Manifest Climate Can Help

We can help! If you want to keep up with investors and start — or continue — your journey to net-zero we can make it happen. Manifest Climate is a climate intelligence SaaS platform that combines cutting-edge technology, an industry-leading database of climate disclosures, and ongoing support from climate experts to deliver best-in-class climate guidance at scale. We provide an easier, faster, and more cost-effective way for organizations to build climate competence, stay on top of key climate trends and understand how to improve their climate actions and disclosures. Let us help you navigate your way in an increasingly low-carbon future.