The race to Net Zero: How to navigate a new world of climate commitments
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As tens of millions of fans tuned into the Euro 2020 football competition last summer, one company was hoping that their eyes picked out a catchy new slogan on the pitch-side billboards.
One of Europe’s biggest carmakers and one of the competition’s sponsors, had bought this prime advertising space to promote their commitment to being carbon-neutral or ‘Net Zero’ by 2050. In their marketing-speak, this was their ‘way to ZERO’.
Sometimes we can gauge the public mood by the adverts companies choose to promote. The automaker’s decision to advertise their Net Zero pledge at a European football competition reflected their knowledge that awareness of climate change had risen quickly among Europeans.
That rising awareness is reflected in Google Trends rankings, where searches for ‘Net Zero’ hit a 5+ year global high in May 2021, before seven new peaks were hit between September and November.
This search data, and the proliferation of Net Zero adverts, show what we can already feel from reading the news or watching TV: that more and more companies, investors, and governments are committing to carbon neutrality and Net Zero.
Why it feels like everyone is going Net Zero
If so many areas of society, from governments to companies, investors to normal citizens are committing to Net Zero, the question is: why?
The answer is simpler than it might seem. More people have realised that humanity must reach Net Zero on greenhouse gas emissions if it will ever stabilise human-induced global temperature increases, no matter what temperature level is chosen as the maximum level, whether 2°C or 1.5°C above preindustrial levels.
Without Net Zero, global temperatures will keep rising forever.
When we look at a temperature goal such as 1.5°C, which was enshrined as the ‘ideal’ limit in the Paris Agreement, it’s important to realise that global temperatures have already risen a significant part of that. On average, temperatures today are more than 1°C higher than the preindustrial level – a reference period between 1850-1900 chosen as it is the “earliest period with near-global observations”.
While temperatures have already increased, achieving Net Zero by 2050 has the power to cap the overall temperature increase at a level that causes the minimum amount of climate change. Companies well positioned to achieve this goal with their products and operations should greatly benefit. Investors, aside from moral considerations, will want to pick these “Net Zero” winners, and avoid losers. Taken together, these motivations are driving a global race to Net Zero.
The race Net Zero
- Countries
Several countries seem to be racing each other for Net Zero. Germany is one: in May 2021, the German government announced its intention to reduce carbon emissions by 65% by 2030, 85-90% by 2040, and to be Net Zero emissions by 2045. Germany has consistently been Europe’s highest CO2 emitter, and the country’s previous goals were a 55% reduction by 2030 and carbon neutrality by 2050. Among other notable government commitments, the US Biden administration has announced a -50%/52% cut by 2030, and the UK committed to a hefty -78% reduction by 2035. - Corporations
The race to Net Zero is found in the corporate world, too. Around 3,100 companies have set Net Zero goals by 2050 as part of the UN-backed “Race To Zero” initiative, and recent report found that “of the world’s 2,000 largest public companies, at least one-fifth (21%) now have Net Zero commitments, representing annual sales of nearly $14 trillion.”1
Dozens have committed to Net Zero even sooner. These include Schneider Electric by 2030, Unilever by 2039, Coca Cola, Orange, Amazon all by 2040, and Engie by 2045. Microsoft pledged in 2020 to be carbon negative (i.e. not just neutral) by 2030, with or without compensation, and by 2050 to “remove from the environment all the carbon the company has emitted either directly or by electrical consumption since it was founded in 1975.” The Paris Agreement targets carbon neutrality in 2050, so we are seeing some of the world’s major companies commit to an even more stringent timeline. - Investors
Investors have also joined the race to Net Zero, with several setting very public targets for carbon neutrality in their portfolios, in some cases even sooner than 2050. Sweden’s Swedbank Robur and the UK-based Aviva target carbon neutrality by 2040, while J Safra Sarasin aims for the same by 2035. These investors are choosing to go one step further than the major initiatives such as the Net-Zero Alliance (for asset owners) and Net Zero Asset Managers Initiative (for asset managers), the latter of which Amundi joined in July 2021.
Scrutinising climate commitments
Looking at the climate pledges made across countries, companies and investors, a picture is painted of impressive progress towards sustainability and emissions reduction. However, as investors, we must resist the urge to get swept along by impressive announcements and stories, without subjecting them to proper scrutiny.
In truth, each statement laid out above represents a slightly different reality and different targets. We must be very discerning in our approach to overbidding in the race to Net Zero, to ensure that assets are invested for maximal impact and to avoid falling prey to greenwashing.
To navigate the new world of Net Zero, there are certain important tips to bear in mind which can help you to interpret what a commitment really means.
Step #1: Understand the “carbon budget”
Carbon budget, like Net Zero, is a commonly heard but sometimes misunderstood term.
This term refers to the remaining amount of CO2 that can be emitted globally, beyond which point a given temperature outcome (e.g. above 1.5°C, or above 2°C) is ‘locked in’.
Carbon budgets can be accurately calculated because we increasingly understand the correspondence between cumulative emissions and temperature increases, and also between warming and meteorological changes across regions.
We know the current level of global warming (+1.1°C above the preindustrial2). We also have a maximum level of warming beyond which we can expect severe climate impact (1.5°C). And because of improved modelling, we understand that there is a near-linear relation between cumulative emissions and warming – put simply, a given amount of emissions leads to a given level of warming.
With these three inputs, we can calculate how much CO2 can be emitted before we blaze through the 1.5°C and 2°C barriers.
Between 1850-2019, approximately 2,390Gt CO2 equivalent was emitted2. To have a roughly 2/3 (67%) chance of keeping warming to 1.5°C, there is around 400-500Gt CO2 left to ‘spend’. Currently, the world emits approximately 42Gt per year3 – a figure which would use up the remaining amount in 10-15 years.
When you hear someone talk about carbon budget, it refers to a very simple concept. We have already spent 2,390Gt. We have around around 500Gt left to spend. Carbon budgeting is all about how to spread out that final allowance over time.
Step #2: Factor in “base date”
Now that we are clear on the concept of carbon budget, the next most important term to understand when interpreting climate commitments is the “base date”.
A base date is an anchor point used in any commitment to reduce emissions. This is just as important as the target year, and generally far less visible.
For example, the EU’s latest “Fit for 55” legislation package targets a reduction in GHG emissions of -55% by 2030 (revised up from -40% then -50%). This -55% target is calculated versus a base date of 1990. The same is true for Germany’s updated -65% 2030 target, and the UK’s -78% – they all use 1990 as a reference point. But the US commitment, in contrast, uses a base date of 2005.
You might be thinking: so what? Well, when interpreting a commitment that promises a percentage decrease by a certain point, a base date is required to make any sense of it. You can say “I will halve my consumption of chocolate” – but do you mean compared to the two bars eaten yesterday, or the 20 bars eaten on this day last month?
To examine this idea further, we can take the example of Amundi’s Paris-Aligned ETFs. These track Paris-aligned Benchmarks (PAB) which apply an immediate -50% reduction in GHG emissions compared to a parent index (e.g. an MSCI World Paris-Aligned ETF is based on the MSCI World index). Having reduced emissions by 50%, they continue to decarbonise at a rate of 7% per year.
Now we will want to contextualise these claims. What is the base date?
Amundi provides Paris-Aligned ETFs tracking indices from either S&P Dow Jones or MSCI. The base date for S&P Paris-Aligned ETFs is February 20204, it is May 2021 for those tracking MSCI Climate Change Paris-Aligned Select Indices, and March 2022 for those tracking MSCI SRI Filtered PAB indices5.
The central IPCC scenario used to limit warming to 1.5°C is based on GHG emissions peaking in 2020, reaching the target 50% reduction milestone in 2030, and Net Zero in 2050, which corresponds to a pathway reducing gross emissions by 7% each year until 2050. Paris-Aligned ETFs go one step further than this scenario. They reduce emissions by -50% at the base date, and then adopt the -7% yearly trajectory afterwards.
Thanks to the initial buffer, this methodology goes beyond the 1.5°C scenario codified in Paris, meaning that Amundi’s Paris-Aligned ETFs should be Net Zero sooner than 2050 – if we follow the same assumptions.
Step #3: Challenge baked-in assumptions
Speaking of assumptions, there is one final point to remember to be an informed climate investor. So far, we’ve looked at the importance of understanding carbon budget, and interpreting emissions reductions targets in relation to the base date used.
However, aside from rare businesses which can ‘go Net Zero’ today, these pledges are at best trajectories for change over several years, trajectories which are based on important assumptions.
These assumptions include the ability to decarbonise at a given pace (i.e. higher than today’s pace) in future, or that there will be development of more effective carbon capture & storage solutions to mitigate emissions.
The chart below demonstrates the expected contribution of negative emissions in the path to Net Zero. All the central scenarios from Intergovernmental Panel on Climate change (IPCC) and International Energy Agency (IEA) rely heavily on negative emissions, meaning carbon removal. Carbon removal allows for some level of carbon emissions to continue, as the net balance is still neutral or negative. Reaching Net Zero before 2050 (e.g. 2040) would mean either decreasing gross emissions faster than 2050 scenarios, and/or using higher assumptions of negative emissions.
It's important to be realistic with ourselves about the assumptions shown in the chart above. In some cases, the technology that is expected to deliver improved carbon removal is still in the theoretical or prototype stage. This might explain why the May 2021 report from the IEA recommends trajectories based on faster emissions reduction but lower carbon removals. The assumptions can change over time, and an informed investor should understand this.
To illustrate again with Amundi’s Paris-Aligned ETFs: earlier, we said that these ETFs should hit Net Zero before 2050. Thanks to the 50% emission reduction buffer at inception, our calculations, based on previous modelled trajectories, suggest that Amundi’s global S&P Paris-Aligned ETF (as an example) would be Net Zero slightly ahead of the 2050 deadline, around 2045.
Based on latest IEA scenario (faster reduction after 2030 and lower removals), we would expect this ETF to achieve Net Zero closer to 2049 – demonstrating how changes in assumptions can affect the expected outcome.4
Net Zero is an extremely positive shift – but it still requires proper scrutiny
None of this is to take anything away from the importance of Net Zero and the great progress that has already been made. Amundi is a firm believer in the urgency of climate change and the great opportunity and responsibility that lies with investment managers and asset owners to move this change forward.
We believe that all market participants should feel equipped with the best possible information to make the right choices – and this includes an ability to look beyond headlines and assess commitments with a clear eye.
Our Climate Clarity guide was written with this goal in mind, to help investors put the Paris Agreement goals into practice. Otherwise, all the key information on Amundi’s full climate and ESG ETF range is available on our website's climate hub.
1.Taking stock: A global assessment of net zero targets, ECIU and Oxford Net Zero, March 2021 https://eciu.net/analysis/reports/2021/taking-stock-assessment-net-zero-targets
2.IPCC Working Group I report, the first instalment of the IPCC’s upcoming Sixth Assessment Report (AR6), August 2021 https://www.ipcc.ch/report/ar6/wg1/downloads/report/IPCC_AR6_WGI_SPM.pdf
3.IPCC Special Report on Global Warming of 1.5 °C (SR15), October 2018 https://www.ipcc.ch/sr15/chapter/spm/
4.S&P Paris-Aligned & Climate Transition (PACT) Indices https://www.spglobal.com/spdji/en/documents/methodologies/methodology-sp-paris-aligned-climate-transition-pact-indices.pdf
5.MSCI Climate Change Paris-Aligned Select Indexes https://www.msci.com/eqb/methodology/meth_docs/MSCI_Climate_Change_Paris_Aligned_Select_Indexes_Methodology_May2021.pdf
MSCI SRI Filtered PAB indices https://www.msci.com/eqb/methodology/meth_docs/MSCI_SRI_Filtered_ex_Fossil_Fuels_PAB_Indexes_Methodology.pdf
6.Amundi ETF estimates, February 2022
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