The term ‘net-zero emissions’ is about achieving balance between the greenhouse gas (GHG) emissions we produce and those we take out of the atmosphere. The concept is also called climate or carbon neutrality. This article will explore efforts around the world to achieve net-zero emissions. It will also look at how net-zero is considered in the investment approach.

Why do we need to reach net-zero emissions?

Human activities (such as the burning of fossil fuels) and changes in land use (such as deforestation) release GHGs into the atmosphere. GHGs trap heat in the atmosphere, which causes global average temperatures to increase. Over time, the result is climate change. For example:

• Global average temperatures have already increased by ~1^oC since pre-industrial times.
• Increasing average temperatures cause more intense and frequent weather events and shifts in climate patterns. Examples include hurricanes, floods, wildfires, more extreme heat, droughts and more.

In 2018, the Intergovernmental Panel on Climate Change (IPCC) made clear that any increase in warming beyond 1.5^oC by the end of this century would have significant implications. According to the IPCC, to achieve this goal, the world needs to do two things:

1. Cut GHG emissions by 45% by 2030.
2. Reach net-zero GHG emissions by 2050.*

Annual CO₂ emissions, by region

Annual production-based emissions of carbon dioxide (CO₂), measured in tonnes (1860 - 2020). Source: Global Carbon Project, Our World in Data.

How do we get there?

The 2021 IPCC report showed that global warming could well exceed 1.5^oC by 2030 unless there are deep reductions in carbon dioxide (CO₂) and other GHG emissions.^* This will require major transformation across our energy, food, transportation and infrastructure systems.

The transition of the energy sector is critical. It is already being driven by several factors:

• new climate regulations
• lower costs for renewable electricity
• higher demand for power due to the shift to electric vehicles
• changing investor expectations.

Changes in what type of energy we use and how we use it will help reduce emissions. However, the IPCC report also makes clear that achieving net-zero is not possible without technologies or nature-based solutions that remove emissions from the atmosphere. Examples include technologies that enable carbon capture and storage, tree planting and improved land-use management.

The energy transition has already begun. But to date the speed, scale and scope of this transition has been uneven and inconsistent across regions and countries. The pace of change is clearly on the rise, however. Companies across sectors and regions are increasingly taking action to address material climate risks and opportunities that result from the transition to net-zero.

The image below shows the main sectors where de-carbonization will need to take place.

Who has made commitments to net-zero emissions?

In November 2021, the UN Climate Change Conference (COP26) brought together 197 countries to accelerate action in achieving the goals of the Paris Agreement and the UN Framework Convention on Climate Change. Commitments made prior to COP26 had the world on a 2.7^oC pathway.² However, according to the International Energy Agency, if all the climate pledges announced at COP26 are met in full and on time, this would be enough to hold the rise in global temperatures to 1.8 °C by 2100.³

Of course, meeting climate targets is by no means guaranteed. But this marks the first time that commitments have the world on a temperature pathway of below 2^oC. It also shows the importance of translating country commitments into sector transition plans, government policies and concrete actions. Here are a few highlights from the COP26 conference: 

More than 100 countries signed on to the Global Methane Pledge.⁴ Methane is one of the most potent greenhouse gases. If successful, the pledge to cut methane emissions by 30% by 2030 could reduce global warming by an additional 0.2% by 2050.⁵ Countries signing the pledge include the U.S., European Union, Canada and Brazil. Large methane emitters such as China, India, and Russia were notably absent.

More than 100 countries signed on to a commitment to halt global deforestation by 2030. The list includes Brazil, China, Colombia, Congo, Indonesia, Russia, Canada and the U.S.⁶ Forests are critical to climate objectives. Trees absorb carbon emissions, help regulate ecosystems and can reduce the physical impacts of climate change.

References to coal and fossil fuel subsidies made their way into a new Glasgow Climate Pact. The Glasgow Climate Pact was signed by all 197 participating countries.⁷ This marks the first time an agreement includes coal and the goal of reducing coal power generation, a carbon-intensive source of electricity. The agreement also includes the goal of eliminating inefficient fossil fuel subsidies. It further requests that countries review and strengthen their climate pledges in 2022, with a view to limiting global warming to 1.5^oC.

This past year also saw the number and scope of corporate net-zero emissions targets continue to grow. This includes commitments from BP,⁸ Ford Motor Company,⁹ Walmart,¹⁰ American Airlines,¹¹ Apple,¹² Microsoft,¹³ Cemex¹⁴ and more. Corporate net-zero emissions targets typically vary across four key dimensions¹⁵ as shown below:

Key dimensions in corporate net-zero targets

When it comes to addressing climate change, companies are seeing increasing demand for action from their shareholders. For example, the Harvard Law School Forum on Corporate Governance reports that in the United States, average investor support for environmental shareholder resolutions rose to 41% in the first half of 2021. That’s up from 32% in 2020.¹⁶ Consistent with the rise in government and corporate commitments to net-zero targets over the past year, this proxy voting season we saw a number of shareholder proposals requesting companies set specific net-zero GHG emission targets. Or they were asked to report on how their current policies align with a net-zero ambition. For example:

• Imperial Oil, a large oil and gas producer in Canada, received a Climate Action 100+ flagged shareholder proposal. This proposal requested that the company adopt a company-wide goal to achieve net-zero GHG emissions by or before 2050. Although the company has a short-term target to reduce its GHG emissions by 2023, it was falling behind peers on adopting long-term targets. In addition, with Canada’s commitment to having net-zero GHG emissions by 2050, there was increased regulatory risk that the company might not be ready to adapt in the event of new regulation for the energy sector.
• Caterpillar, the world’s largest manufacturer of construction equipment, received a similar request. The company had made major progress on reducing its GHG emissions through 2019. However, it did not have a GHG reduction target past 2020. And, as of January 2021, the company had not met any of the Climate Action 100+ net-zero indicators.

How does net-zero factor into RBC GAM’s investment approach?

RBC Global Asset Management (RBC GAM) supports the global goal of achieving net-zero emissions by 2050 or sooner. We also recognize and support the need to achieve a just and orderly transition to net-zero that promotes widely shared economic prosperity. This includes:

• integrating financially material climate factors in our investment approach
• measuring and monitoring the alignment of issuers to net-zero
• actively engaging with issuers for whom climate change is a material financial risk if they don’t have net-zero targets and action plans.

Issues that our investment teams may consider include:

• Does the company have effective governance structures to manage climate-related risks and opportunities?
• Has the company set comprehensive climate targets to address material financial risks due to climate change? Do they have a robust transition and action plan to meet those targets?
• Are climate risks and opportunities integrated in the corporate strategy?
• Does the company offer transparent disclosure on the climate risks and opportunities they face and how these are integrated into strategic and financial decision-making?

When it comes to our own operations, we are committed to maintaining net-zero emissions. In fact, RBC first achieved net-zero operations in 2017 and each year thereafter. As a formal supporter of the Task Force on Climate-Related Financial Disclosures (TCFD), we believe that transparent disclosure of climate risks and opportunities is important. We provide detailed climate reporting in our 2021 TCFD Report.