From carbon emissions and footprints to a net zero economy - what does it all mean?
Since the UK government declared a climate emergency and became the first major economy to commit to reduce emissions to net zero by 2050, sustainability has been rising on many agendas.
We are seeing more and more net zero commitments from companies, cities, countries, organisations and investors. And we are also starting to see more short-term targets being announced, actions being taken and policy changes taking place to achieve these long-term commitments.
At Barnett Waddingham, we have announced our net zero pledge, as we commit to doing the right thing for now, and over the longer term, to build a sustainable future (more on that later).
Greenhouse gas (GHG) emissions, also known as carbon emissions, are categorised into three groups or 'Scopes' by the most widely-used international accounting tool, the GHG Protocol.
Scope 1 – all direct emissions from the activities of an organisation, or those under their control. This includes fuel combustion on site, from owned vehicles and fugitive emissions. Examples include fleet vehicles and gas emissions from boilers.
Scope 2 – indirect emissions from electricity purchased and used by the organisation. Emissions will be created during the production of the energy and eventually used by the organisation. This includes electricity from an energy supplier to power computers, heating and cooling.
Scope 3 – All other indirect emissions from an organisation’s activities occurring from sources that they do not own or control. This is usually the largest share of the carbon footprint, especially for office-based companies, covering emissions associated with business travel, procurement, waste and water.
You will often see emissions reporting expressed as CO2e or carbon dioxide equivalent. There are seven greenhouse gases covered by the Kyoto Protocol: carbon dioxide (CO2); methane (CH4); nitrous oxide (N2O); hydrofluorocarbons (HFCs); perfluorocarbons (PCFs); sulphur hexafluoride (SF6); and nitrogen trifluoride (NF3).
CO2e is a standard unit for reporting carbon footprints. It converts the impact of each different greenhouse gas in terms of the amount of CO2 that would create the same amount of warming. This means a carbon footprint consisting of lots of different greenhouse gases can be set out in a single number.
So, what does net zero mean?
Net zero looks at greenhouse gas (GHG) emissions overall. When the amount of carbon being emitted is cancelled out by the amount that is removed, the global economy will reach ‘net zero’. This means reducing existing emissions and actively removing greenhouse gases from the atmosphere.
We know we need solutions to transition to net zero, and we need those solutions and that transition to take place in a way that protects people and communities, supporting them alongside the economy. At the same time, we still need energy and we still need jobs. Our global economy is powered by fossil fuels and that world isn’t going to change overnight. But we know decarbonisation of the economy means substantial changes to our energy, transport, infrastructure, land use, industrial and urban systems.
"What changes have you made to your own lifestyle? More recycling? Producing less waste? Do you use green energy? Are you thinking of buying an electric/hybrid car? Do these have the same costs as the fossil-fuelled versions? Moving to net zero is about making these types of decisions at a corporate level."
A company needs to reduce emissions throughout their whole value chain and permanently neutralise any remaining emissions so that there is no build-up of GHGs in the atmosphere. Carbon offsets provide the ‘net’ in net zero – businesses, governments or individuals pay someone else either to reduce emissions or permanently remove a given quantity of greenhouse gases from the atmosphere. Changes in government policy as well as litigation risk for high emitters could create big financial losses for those who are not on track. While those enabling the climate transition through new products and services will reap the benefits.
Many employers are putting sustainability policies in place and will be making their own net zero commitments, responding to pressure from consumers, employees and other stakeholders. Does your sponsor have a sustainability policy or a net zero commitment?
The campaign is raising awareness of where pension money is invested, increasing member demands for their money to be invested to build a better future.
It has found that 68% of UK savers want their investments to consider people and planet alongside profit.
The campaign is encouraging people to get involved: one of the asks is to see how their pension fund plans to lead on responsible investment, by asking questions such as how they’ll achieve net zero emissions, increase their positive impact and use their shareholder rights to get companies to perform better.
Read more about the Green Pensions Charter urging the pensions industry to agree net zero targets.
Greening portfolios or greening the economy?
There’s a real need to manage the transition and the decarbonisation of the economy, and one of the most important roles investors can undertake in navigating this journey is ensuring effective stewardship of their investments.
A portfolio aligned with a credible pathway to delivering on net zero needs to consider achieving emission reductions in the real economy. Investors, who control access to capital and can influence company management, need to understand how companies expect to transition. They will be looking at what plans are in place as we move to net zero, and asking questions like, what infrastructure assets are going to be needed in a net zero economy? They will also be looking to avoid the risk of stranded assets as policy changes begin to bite.
Of course, it is possible to have a low carbon or net zero portfolio today, which should offer protection against stranded asset risk. However, removing heavy carbon emitters from a portfolio does not stop those companies from emitting, while they may move into ownership that is less concerned with greening the economy.
Although a greener portfolio is going to be the right way forward for some, without a green economy, climate change is still going to impact investors and beneficiaries. At the same time, investors could miss opportunities coming from the transition, as companies invest and adapt to a low carbon world.
Carbon sinks are things that absorb more carbon from the atmosphere than they release – like oceans, forests and soil (including peatland and permafrost).
Carbon capture and storage (CCS) is a three-step process:
- capturing the carbon dioxide produced by power generation or industrial activity;
- compressing and transporting it; and
- storing it permanently geological formations deep underground.
Assets that are carbon sinks or CCS can diversify a portfolio as a way of having a positive impact on the climate and balancing emissions that are harder-to-abate.
Emissions from areas such as heavy industry (cement, steel, chemicals and aluminium) and heavy-duty transport (shipping, trucking and aviation) are considered ‘harder to abate’.
This is because the technological solutions (known and in development) carry a higher abatement cost than current higher-carbon technologies.
These sectors are vital to achieving net zero emissions as they represent a third of global emissions (and this proportion is rising).
Our net zero commitment
At Barnett Waddingham, we recognise that there are system-wide risks to the markets that deliver investors good outcomes, including climate change, inequality and biodiversity destruction. We believe every organisation needs to play its part to help move to a sustainable future and that’s why we have pledged own net zero commitment.
"In 2021, we will be net carbon neutral for Scope 1 and 2 emissions. We have made significant reductions in our carbon footprint, reducing emissions across the business, and are using high quality, nature-based offsets to achieve neutrality, considering biodiversity and communities in our purchases."
We have also committed to be operationally net zero, including all indirect emissions that occur in our value chain (Scope 3), by 31 May 2025, if not sooner. We are developing a framework to select the best ecological and economical goods through all our procurement activities as an organisation, including energy, construction, transport, catering, energy-using equipment and other services. And we’re measuring and understanding our impact, putting in place an environmental management system by the end of 2021 to accurately identify our environmental performance and enable us to make precise improvements.
We think a systemic change like reaching a net zero economy can only be achieved by working together, so we collaborate with others who are also looking to go further and faster in moving to a sustainable future through organisations such as the Institute and Faculty of Actuaries (IFoA), Investment Consultants Sustainability Working Group (ICSWG) and the Pensions Climate Risk Industry Group (PCRIG).
At the same time, we are integrating how to achieve net zero into our advisory services, so that we can help clients understand the risks and opportunities associated with climate change. As advisers to more than £80bn of client assets, we are supporting investors to consider net zero alongside their other investment objectives, managing risk and seeking returns through the transition to a low carbon economy.
We are on our own journey to net zero. Speak to us today to get started on yours.
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