Carbon solutions and improvers
A potential approach to achieving net zero in a portfolio revolves around finding and investing in companies that have "carbon solutions" or are "carbon improvers".
Allocating to climate solutions: these are companies whose products and services directly support moving the global economy toward achieving climate goals.
Allocating to carbon improvers: these are emissions-intensive companies on a clear and credible pathway to reducing their emissions in line with global net zero scenarios via changes in their production processes (reducing scope 1 and 2 emissions, e.g., an aluminum producer switching from coal to hydropower) and/or through a shift in their product mix toward climate solutions (reducing scope 3 emissions, e.g., a car company shifting to make electric vehicles).
It is important to understand the difference between reducing emissions in an investment portfolio and reducing emissions in the real economy.
Net Zero Asset Owner Alliance
This article is a review and commentary on a blog by Bridgewater Associates, which can be found here: https://www.bridgewater.com/research-and-insights/pursuing-net-zero-goals-in-public-equities
Identifying climate solutions
Climate solutions are companies whose products and services already generate positive climate outcomes today, by directly helping to lower the carbon footprint of the economy in emissions-intensive sectors where reductions are most needed.
Identifying climate improvers
Carbon improvers are companies on a clear and credible pathway to reducing their emissions in line with global net zero. Carbon improvers either need to (a) have changes in how they produces their goods and services to reduce emissions in the production process (reducing scope 1 and 2 emissions) or (b) have changes in their product mix to one that will reduce greenhouse gas emissions in the economy (reducing scope 3 emissions).
Bridgewater assesses a corporate plan to reduce emissions across three metrics: feasibility, intent and actions.
A systematic approach
Bridgewater outline an a top-down, data driven approach to identifying these companies that uses:
For climate solutions, examine companies’ revenue alignment to climate-related metrics, such as UN Sustainable Development Goal 13 on Climate Action.
For carbon improvers, assess companies’ emissions reductions plans.
The Bridgewater house view is that while a portfolio allocation that is overweight climate solutions and carbon improvers is likely to have higher spot emissions metrics than if investors were to take the common approach of simply reducing allocations to these emissions-intensive sectors, it is likely to have more impact on the net zero transition over time.
Engagement with climate laggards
One area that the analysis does not cover is the role that active ownership can play in supporting a net zero transition. Holding small holdings in climate laggards (high carbon intensity companies) and working with the management teams to implement transition plans should also be considered in the impact mix.
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