What Is Net Zero and How Can It Improve Your ESG Strategy?

Governments, companies and investors have all been talking about achieving net zero goals. Yet with all the momentum and growing pledges around the world, there remains noise without substance and continuous greenwashing when it comes to achieving net zero.

In this article, we simplify the issue and explain what achieving net zero is and what it means to achieve it in 2022. More importantly however, for investors and asset managers looking to invest in sustainable portfolio companies, this article explains why achieving net zero goals drastically improves their overall ESG strategy.

What Is Net Zero?

According to the United Nations, net zero means “cutting greenhouse gas emissions to as close to zero as possible, with any remaining emissions re-absorbed from the atmosphere, by oceans and forests for instance.” Another way to put it is the balance between the number of greenhouse gases that is both produced and removed from the atmosphere. The consequences if we do nothing would render the environment, society at large and the global economy to be dangerously damaged.

This scientific explanation, which after all, is rooted in a scientific problem, is addressed by countless academic experts and political leaders. Study after study, including the IPCC report that was released earlier this year concludes that it is “now or never” to achieve net zero targets by 2050.

Moreover, The Paris Agreement ensures the 194 countries that joined the legally binding international treaty are abiding by the commitments on climate change, including to

substantially reduce global greenhouse gas emissions to limit the global temperature increase in this century to 2 degrees Celsius while pursuing efforts to limit the increase even further to 1.5 degrees;
review countries’ commitments every five years;
provide financing to developing countries to mitigate climate change, strengthen resilience and enhance abilities to adapt to climate impacts.

As a result, many countries and governments are united in this mission: to keep the global temperature below a rise of 1.5°C – including the ESG community.

What Part Does Net Zero Play in ESG?

Achieving net zero targets is a specific commitment that falls under the environmental aspect of ESG. That being said, as of May 2022, forty-three Net Zero Asset Managers (NZAM) have already committed $16 trillion (£13 trillion) in the latest disclosure report in order to reach net zero investment by 2050.

Large asset managers such as Schroders and Lazard are part of the NZAM initiative as a way to make the ESG fund management market more transparent and credible.

Some asset managers want to go further, including Edward Mason, Director for Generation Investment Management (GIM), saying “Achieving net zero emissions by 2050 on a 1.5C pathway across the global economy and the halving of global emissions this decade will require sustained action across all elements of the NZAM commitment by all signatories. We have unquestionably seen a positive start towards these monumental goals, but we are now into the hard work, year on year, of delivery.”

While ESG investments and public consciousness are making it more likely that net zero targets will be reached by 2050, there is also growing concern that companies and asset managers are greenwashing their net zero claims. RepRisk, an authority in ESG data science, published a detailed article concluding that ESG risk incidents between 2012-2022 increased, especially in Europe and the Americas. An ESG risk incident reflects a company’s poor performance, vulnerabilities and exaggerates climate commitments, including net zero strategies – in other words, an ESG risk incident predicts how likely a company greenwashes future sustainability claims.

The Chief Executive for RepRisk found two significant challenges in preventing greenwashing:

Companies need to move away from the tick-boxing mindset as if reporting on net zero emissions is a menial task.
Secondly, companies need to ostensibly show the ins and outs of their behaviours on net zero strategies compared with their messaging.

If there is any hope of achieving net zero by 2050, the solution is through transparency and accountability – how will you hold your company accountable?

What Can You Do Next?

With climate change regulations continuing to rise globally, companies still need a way to implement their net zero goals in a strategic and holistic framework. Without such a strategy, data on net zero carbon emissions will fall flat, not to mention that companies are more likely to greenwash as there is no accountability.

As the ESG manager Tom Hancocks says for Squire Patton Boggs, an international law firm: ‘It takes a huge amount of infrastructure to actually achieve things like net zero. But pushing and making commitments in that direction is an important first step.’

If your company wants to be part of the journey of transitioning to a net zero economy, Maanch offers a technological solution.

At Maanch we provide ESG & Sustainability Advisory solutions, including decarbonisation strategies for companies. We also offer climate finance risk assessments to help map out potential risks your company will face.