2020 marked the end of the hottest decade on record. With global greenhouse gas (GHG) emissions having increased by almost 50% since 1990, actions to halt climate change are increasingly urgent. The 196 signatories of the 2016 Paris Climate Agreement agreed on the goal of limiting global warming this century to well below two degrees Celsius compared to pre-industrial levels, but most countries are not on track to meet their emissions reduction goals.
As environmental focus intensifies, achieving net-zero emissions by 2050 has become the new benchmark among policymakers. Last year the UK and France became the first major economies to sign a net-zero 2050 target into law. Others have quickly followed suit and 58 countries (54% of global GHG emissions) have set net-zero targets, a number we expect to grow. Notably, China recently reiterated its ambitions to achieve the net-zero goal by 2060, allowing itself more time to reach its goal, but setting a more ambitious change relative to others.
EXHIBIT 1: GREENHOUSE GAS EMISSION TARGETS
BILLION TONNES/YEAR, CO2 EQUIVALENT
The challenge is not in setting the targets but in achieving them. Major breakthroughs in climate technology to overcome the current hurdles will require the right policy mix by governments to foster these advancements, as well as companies that are focused on delivering on their own environmental goals.
This series of papers provides a framework to understand and address the challenges of getting to net zero and the associated investment implications. The following papers will assess the:
- The scale of the challenge ahead
- The potential strategies needed to reach net-zero emissions
- The options for policymakers and considerations for investors
In summary, we find that quantifying the scale of the problem is a challenge in itself, given the need to account for not only the volume of emissions by country but also where each country is on its own path of economic development. Further, while the goal is emissions reduction, they are unavoidable in some instances. This implies that offset strategies will be just as important as the shift to cleaner and more efficient energy, and investors will need to assess corporate commitments on this basis. Bottom-up demand from consumers and end-users to reduce emissions is a powerful force for change, but policymakers are crucial in fostering an environment where investment in the right technologies takes place. However, carbon pricing schemes and emissions trading will also be part of the successful policy mix.
Across the different investment desks, there are both opportunities and risks. Following a decade of dominance for consumer-facing technology companies, companies that can achieve climate-based technology solutions look set to be the biggest beneficiaries of any new environmental initiatives. Regardless of the industry under consideration, a thorough understanding of how the wave of policy changes ahead will impact cash flows and valuations will be essential.