The race to achieve net zero emissions has played a significant role in pushing forward the fight against climate change. Key stakeholders are becoming alive to the opportunity presented by a decarbonised economy and those who do not get on board now risk being left behind.
What is net zero?
Simply put, net zero is premised on attaining a balance between greenhouse gas emissions produced and the amount removed from the atmosphere.
The concept of net zero gained momentum following a 2018 report by the Intergovernmental Panel on Climate Change which concluded that in order to reach the 1.5ºC target committed by various countries in the Paris Agreement, global emissions must be reduced by half by 2030 and need to reach net zero by 2050. Various countries, cities and companies have made commitments to achieve net zero. Most notably in 2020, the EU, Japan and China announced their commitments to achieve net zero.
For its part, South Africa, a country still heavily reliant on fossil fuels for the generation of electricity, has committed to achieving net zero by mid-century in its low emission development strategy published in 2020.
What does net zero mean for investment?
Realising their role as catalysts in the global fight against climate change, investors are increasingly focusing on companies’ integration of environmental, social and governance (“ESG”) in their business model and commitment towards achieving the net zero target.
This is given credence by Larry Fink, Chief Executive of BlackRock, the world's largest asset manager, in his annual letter to CEOs where he urges companies to commit to net zero and alludes to a possible divestment in companies that fail to do so.
From an investor’s perspective, companies that are best placed to receive ESG investment are those that voluntarily adopt ESG principles and commit to achieving net zero.
In 2020, the Financial Sector Conduct Authority, in collaboration with the International Finance Corporation, conducted an industry wide survey which was published in March 2021. This survey looks into the opportunities available for the South African retirement industry to leverage on green and climate finance. This is a clear demonstration that key stakeholders are recognising their role and taking action towards facilitating the transition to a low carbon economy. In its survey, the “IFC estimates there is US$588 billion in climate mitigation investment potential in selected sectors in South Africa up to 2030, and US$29 trillion investment potential across 21 emerging markets representing 48 percent of global emissions. This does not include investments needed to support adaptation and resilience”.
What impact has COVID-19 had on net zero and ESG?
The COVID-19 pandemic has intensified the sense of urgency around climate change. The International Energy Agency highlighted in a report this year that global carbon dioxide emissions have returned to pre-pandemic levels. It has been argued that the COVID-19 pandemic has derailed some companies plans to “green” their companies and integrated ESG.
However, the pandemic, undoubtedly presents an opportunity for companies to align more closely with climate change objectives, including the commitment to achieve net zero as part of their post-crisis recovery programmes.
Investor sentiment highlights that companies that do not adapt will be left behind, while those that embrace change will see greater opportunities. It should not be understated that to attain the net zero target and achieve success in attracting ESG investment will be costly and success will be dependent on a company’s ability to transition to clean sources of energy, reducing emissions from appliances by making use of available technology, amongst other efforts.
What remains clear is that investor focus on ESG will continue to grow in the coming years. For South African based companies, the robust environmental and regulatory framework provides a good basis for such companies to position themselves favourably and to attract ESG investment.