ESG investing: What does a “net zero commitment” mean?

“Net zero” has become a buzzword in sustainability and you might hear it used when you’re reviewing investment opportunities. Read on to find out what net zero means and why it could affect your portfolio.

Net zero is part of wider initiatives to reduce the impact economies and businesses have on the environment and the climate.

Specifically, businesses or governments making net zero commitments aim to completely negate the greenhouse gases they produce. Net zero commitments often combine a goal of reducing emissions and implementing methods of removing greenhouse gases from the atmosphere, such as through the restoration of carbon sinks, like forests and wetlands, or carbon capture and storage.

In 2019, the UK government committed to bringing all greenhouse gas emissions to net zero by 2050. Many businesses have made pledges to reduce their contribution to climate change and some, including Unilever and Microsoft, have gone as far as making net zero commitments.

If you consider ESG (environmental, social and governance) factors when making investment decisions, net zero commitments might be something you want to consider. It’s an area some pension and investment funds are already incorporating.

Two-thirds of pension funds have committed to net zero alignment

Figures suggest that an increasing number of pension and investment funds are taking steps to reduce their contribution to climate change.

According to the Pensions and Lifetime Savings Association (PLSA), more than two-thirds of pension funds have made a net zero commitment. 9 out of 10 of these funds are targeting being net zero compliant by 2050 and an ambitious 14% aim to do so by 2035.

Encouragingly, 64% of pension professionals feel their fund has made significant progress in playing its part in the transition to a net zero society.

Of the funds that haven’t already committed to net zero, 30% expect to in the future.

There are many ways a pension fund may align its activities with its net zero commitment. They might start by looking at their own operations and how to reduce emissions, such as making office spaces more efficient.

From an investment perspective, a fund may divest from fossil fuel companies or businesses that operate in energy-intensive sectors, or invest in companies that are pioneering climate solutions. As a stakeholder, pension funds may also use their shareholder power to encourage businesses to adopt more sustainable business practices.

Investment funds with a net zero commitment may operate similarly.

While many large businesses must share energy use and carbon emissions information in their annual reports, it can still be difficult to assess net zero commitments. Some commitments are vague and there’s no guarantee that a business will stick to the plan it’s outlined.

3 useful tips if you want to invest in net zero funds

1. Research a fund’s objectives

While some funds might label themselves “net zero” take a closer look at what their objectives are and their investment criteria. When does it aim to reach its net zero target? How does it engage with companies to promote positive changes?

Keep in mind that you may need to be flexible. Finding a fund that perfectly aligns with all your values may be difficult, so set out what’s most important to you and where you’re willing to compromise.

2. Take a long-term perspective

When investing, it’s often a good idea to take a long-term view when you’re assessing returns. While markets have historically delivered returns over a long time frame, short-term movements mean the value of your investments may rise and fall.

You might need a long-term view when assessing the outcomes of net zero commitments too. Transitioning to a net zero business model may take some firms decades.

3. Don’t forget the importance of diversification

If you want to have a positive impact on the environment, it can be tempting to move all your money into a fund that aligns with your ethics. However, don’t forget about the importance of diversification in your investment portfolio.

Investing in a range of businesses, sectors and geographical locations could help you manage investment risk. By diversifying your investments, you can spread out risk, so when one area experiences volatility, another may balance this out.

Get in touch to talk about ESG investing

If you’d like your investments to support climate change goals, we could help you create an ESG portfolio that considers your values and investment aims. Please get in touch to talk to one of our team.

Please note:

This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.