Carbon-neutral was only recognised as a word in the Oxford Dictionary in 2016, yet the extent to which the word is spoken in boardrooms, fund managers' meetings and colloquially at dinner tables has exploded. Carbon neutrality is achieving net-zero carbon emissions often by obtaining offsetting carbon credits. This is not to be confused with climate neutrality which is inclusive of all greenhouse gases. Numerous countries have committed to becoming carbon-neutral by 2050, although the Climate Crisis Advisory Group encourages earlier target dates. Globally, firms have adopted policies to achieve their own internal goals, with many establishing internal committees and teams to assess, recommend and monitor their progress. Initially, firms would only target scope 1, which includes direct energy supply sources. However, as we move to scope 3, the carbon footprint of the entire value chain will start to be incorporated. This would include procurement to logistics. Globally, firms will have to reform to remain relevant.
Many asset managers are more widely adopting ESG principles in their portfolio construction. BlackRock, one of the largest investment firms globally, announced in 2020 that they will potentially exit assets where they see no progress tackling climate-related risk, as they deem these to be higher-risk investments. 36ONE has also adopted an SRI (Socially Responsible Investing) framework, that encompasses the broader considerations beyond climate - including governance, environmental and social. 36ONE is also a signatory to UNPRI (United Nations Principles for Responsible Investing).
Companies are having to report more detailed strategic plans on how they intend to achieve their goals. Anglo American has a hydrogen strategy driven by 100% renewable energy, with a planned 30% reduction in their GHG emissions by 2030. They have also divested their coal assets and most of their South American operations will be fuelled by 100% renewable energy from 2022. Recently, BHP has announced plans to reconsider their investment in oil and gas and will communicate with the market what their medium-term plans are. These actions will change the investment profiles of companies as the world moves towards carbon neutrality. Investors will require a higher expected return from companies that do not implement changes to their asset and procurement mix, but eventually, certain companies will become non-investable.
We evaluate all our investments. Not only on their current carbon status but also on their path to improving and achieving these objectives. We understand that the capital and time needed by companies to reach acceptable levels is a drain on resources, however, we believe that continual improvement over time will drive excess returns on our investments.
In conclusion, the world is rapidly advancing and changing from a climate, social and equality perspective. Our investments need to reflect companies that will be preparing themselves for the investment climate of tomorrow.