March 16, 2022
Overview
As the conversation on climate change advances around the globe, the goal of achieving “net zero” — a state in which the amount of greenhouse gas (GHG) emissions produced and the amount removed from the atmosphere are balanced — has been gaining momentum. And with good reason. Achieving net-zero emissions is critical to managing the destructive potential of climate change.
Governments, businesses and investors are increasingly putting net zero at the top of their agendas — as seen in the number of discussions and commitments coming out of November 2021’s COP26 climate summit in Glasgow. But those commitments are just a start and must be followed up with action that is both decisive and measurable, and that focuses on both limiting GHG emissions and adapting to a more volatile climate environment.
“Worldwide, there’s a drive to achieve net-zero emissions, and the outcomes of these commitments will have far-reaching impacts across the global economy,” says Natalia Moudrak, managing director and climate resiliency leader, Public Sector Partnership at Aon. “There are important and ambitious targets being set, and the question is what actions, what investments, what behavioral changes and what technological advancements are required to get us there. For climate adaptation, time is no longer a luxury.”
In Depth
The United Nations’ Environment Programme (UNEP) has estimated that meeting the Paris Climate Accords’ goal of limiting global warming to 1.5 degrees Celsius above pre-industrial levels would require reducing global emissions by 7.6 percent yearly between now and 2030.
“We know that if we don’t do this — and we’re seeing it already — the frequency and severity of natural disasters will continue to increase,” says Moudrak. According to Aon’s new 2021 Weather, Climate and Catastrophe Insight report, weather- and climate-related events caused $329 billion in economic losses in 2021, the third highest total on record.
More than 130 countries have set or are considering net-zero targets, as have 21 percent of the world’s 2,000 largest companies. The COP26 gathering also saw the formation of the Glasgow Financial Alliance for Net Zero, a group of 450 financial firms from around the world that have committed $130 trillion in assets toward the effort to achieve net zero.
De-Carbonization Technologies Aren’t Here Yet
Taking the energy sector as an example, most of the emission reductions through 2030 come from technologies that are already on the market today. But by 2050, almost half of emission reductions will need to come from technologies that are still in development.
“On one hand we have enormous momentum and trillions of dollars committed to achieving net zero. On the other, there is an appreciation that low-carbon transition risk landscape is complex and dynamic, requiring bold bets and innovative thinking,” says Moudrak. “So the question is how can we create better links between risk, capital and innovation to increase the flow of public and private finance towards de-carbonization solutions?”
The Importance of Investors
Beyond the government and business commitments to net zero, it’s important to consider the commitments investors are willing to make across industries. While many people associate GHG emissions and climate change with a handful of sectors, such as fossil fuels, carbon and carbon-equivalent emissions are created throughout the economy, so fossil fuel divestment alone isn’t a sufficient approach. The weighted average carbon intensity (WACI) of the MSCI All Country World Index (ACWI) of fossil fuels registers as 117.1 tons of CO2e per million dollars of sales. For the MSCI ACWI ESG Leaders or Low Carbon Leaders, the carbon intensity is roughly 20 percent to 40 percent lower still. To maximize carbon reductions, the net-zero approach really should cut across all industries, all sectors and all parts of the global value chain.
However, investors must also recognize that the transition will take time and that change is required on multiple fronts.
“Let’s say everyone decided to divest from fossil fuel industries at the same time tomorrow, what’s going to happen?” asks Moudrak. “We simply don’t have the right infrastructure in place to support this switch overnight. It will take time to transition the global economy in a way that is not too abrupt or disruptive, and that also doesn’t leave individuals or countries behind.”
Weighing the Social Impact
It’s also necessary to consider the number of people employed in or dependent on fossil fuels and around the world, as well as the economic activity they represent. At the same time, however, it’s necessary to recognize that many of those that will be most affected by climate change are the world’s most vulnerable people. To achieve the full potential of net zero, governments and businesses must also consider the potential social implications of their environmental actions.
Opportunities in the Move to Net Zero
In addition to the impact from a climate perspective, there is an economic case to be made for the net-zero actions governments and businesses would have to take. A move to net zero could benefit developing economies and the workforce. Recent research into energy sector transition estimates that the transformation required for this sector to meet the Paris Agreement goals could actually increase net jobs by about 8 million by 2050, primarily due to gains in the solar and wind industries.
Thinking Through the Move to Net Zero
The move to net zero will be challenging, but it’s critical to limiting climate change. Yet, as businesses commit to moving to net zero, they must do so thoughtfully. Strategic goal setting, sound governance structures and transparent and public reporting must also factor into the path to net zero.
“And of course, while limiting global temperature increases to 1.5 degrees C from pre-industrial levels is critical for long-term habitats, given the effects we’re already seeing, we must continue to prioritize climate adaptation action,” adds Moudrak. “As the most recent report from the Intergovernmental Panel on Climate Change emphasizes, climate change is happening faster than expected and investing into resilience and disaster risk reduction, alongside low-carbon solutions is prudent to limit damage and life loss, especially to protect the most vulnerable populations.”
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