Net zero emissions refers to the goal of not adding to the greenhouse gases (GHG) that have been emitted already into the earth’s atmosphere. By making a net zero pledge, a company commits to reducing its GHG emissions to as close to zero as possible by 2050 and to offset any remaining GHG emissions using negative emissions technologies and carbon-credits, for example.

The net zero campaign stems from the 2015 Paris Agreement, an international treaty on climate change. The overall goal is to stop global warming from exceeding 1.5 degrees Celsius above that of preindustrial levels. Considering that global temperatures have already risen to 1.1 degrees Celsius above that level, this has become a priority of the world’s political and corporate leaders.

Growth in Companies Announcing Net Zero Goals

A growing number of companies have publicly endorsed the Paris Agreement by setting net zero goals of their own. The Net Zero Tracker (NZT), an academic and nonprofit-led initiative, is monitoring the world’s largest 2,000 companies for their GHG emission reduction goals. NZT determined that 717 – or 36 percent – of these companies have set a net zero goal in March 2022, up from 21 percent in March 2021.¹

In addition, some of these companies have signed on to the Climate Pledge, an initiative started by Amazon Corp. The 312 signatories promise to achieve the more ambitious goal of net zero carbon emissions by 2040.

These companies have committed to:

• Measure and report their GHG emissions regularly
• Implement decarbonization strategies in line with the goals of the Paris Agreement
• Neutralize any remaining emissions through quantifiable carbon offsets.

Highlighting the need for transparent and consistent reporting

The net zero pursuit by companies is also attributed to their management teams’ growing recognition that climate transition risk is a material ESG issue. Moody’s forecasts that companies that proactively transition to a net zero business model over the next 10 years will cut their probability of default by 50% versus companies that postpone or are hesitant to act. As a result, we may consider the commitment to a net zero pledge as a credit positive. However, it is important to note that a net zero pledge represents a very ambitious and aspirational undertaking. Many companies express a commitment to reduce emissions by a set amount, yet they may lack transparency in how they intend to achieve their stated goals. There is also inconsistency around emissions reporting.

From an investment analysis perspective, it is important to not just disclose emissions reductions targets but also validate them, for example by an organization such as the Science Based Targets initiative (SBTi).

Only roughly one-third of organizations that have disclosed emissions reduction targets are validated as credible by the SBTi, according to the CDP’s 2021 Climate Transition Plan report. Further, only 6 percent of all reporting organizations disclosed details of a net zero target.

With so many companies signing the Climate Pledge or publicly announcing their goal, it is uncertain whether they all know what their commitment entails. Certainly many Climate Pledge signatories are genuinely on board in their commitments. From an investment perspective, however, it is necessary to take a cautious view.

Scope 3 emissions are critical

A particular challenge for many companies is how to reduce scope 3 emissions, which lie outside of their control. Scope 1 are direct emissions and scope 2 are indirect emissions from the generation of purchased energy. Scope 3 are all indirect emissions stemming across a company’s value chain, from upstream sourcing of raw materials to downstream use of a company’s products or services.

To achieve net zero goals, companies must reduce emissions through their entire supply chain, source less energy-intensive raw materials, and/or develop products that have fewer use-phase emissions.

Although there is no uniform disclosure standard in the U.S., the vast majority of Fortune 500 companies follow the standards outlined by the Greenhouse Protocol. Emissions reporting must be scrutinized based on those metrics.

Decarbonizing effectively requires lower cost curves for existing alternative emissions technologies and for the development of new financially viable negative emissions technologies. For example, Morgan Stanley estimates that a price on carbon of $60/ton CO2 to $150/ton CO2 for Carbon Capture & Storage (CCS) to be economical, this compares to tax credits for captured CO2 of $50/ton in the US and $35/ton for CO2 sequestered through enhanced oil recovery. This illustrates that a higher price on carbon is likely needed to incentivize further CCS investment.²

Other technologies, such as hydrogen and energy storage, will also need to see their cost curves decline to become viable replacements for existing fossil fuel energy sources, so as to reduce GHG emissions.

Breckinridge is committed to accountability

Breckinridge Capital Advisors is monitoring net zero progress among corporations through its Climate Transition Risk framework, which combines quantitative and qualitative analysis to assess the long-term potential of a bond issuer to achieve a net zero outcome. Our engagement with corporate bond issuers is an integral aspect of our qualitative process.

The goal is to understand the ability of corporate bond issuers to achieve their net zero goals, because we view GHG emissions as a material risk to the long-term financial performance and viability of companies in many sectors. Maintaining an objective, detailed assessment as to what companies are doing to back up emissions reduction pledges with tangible progress is an integral component of our security research process.

[1] Shetty, D. (2021, March). A Fifth of the World’s Largest Companies Committed to Net Zero. Forbes. Retrieved from: https://www.forbes.com/sites/dishashetty/2021/03/24/a-fifth-of-worlds-largest-companies-committed-to-net-zero-target/?sh=4a0a3b67662

[2] Morgan Stanley April 2021 report, “Carbon Capture: A hidden Opportunity.”

DISCLAIMER

This material provides general and/or educational information and should not be construed as a solicitation or offer of Breckinridge services or products or as legal, tax or investment advice. The content is current as of the time of writing or as designated within the material. All information, including the opinions and views of Breckinridge, is subject to change without notice.

Any estimates, targets, and projections are based on Breckinridge research, analysis, and assumptions. No assurances can be made that any such estimate, target or projection will be accurate; actual results may differ substantially.

Past performance is not a guarantee of future results. Breckinridge makes no assurances, warranties or representations that any strategies described herein will meet their investment objectives or incur any profits. Any index results shown are for illustrative purposes and do not represent the performance of any specific investment. Indices are unmanaged and investors cannot directly invest in them. They do not reflect any management, custody, transaction or other expenses, and generally assume reinvestment of dividends, income and capital gains. Performance of indices may be more or less volatile than any investment strategy.

Performance results for Breckinridge’s investment strategies include the reinvestment of interest and any other earnings, but do not reflect any brokerage or trading costs a client would have paid. Results may not reflect the impact that any material market or economic factors would have had on the accounts during the time period. Due to differences in client restrictions, objectives, cash flows, and other such factors, individual client account performance may differ substantially from the performance presented.

All investments involve risk, including loss of principal. Diversification cannot assure a profit or protect against loss. Fixed income investments have varying degrees of credit risk, interest rate risk, default risk, and prepayment and extension risk. In general, bond prices rise when interest rates fall and vice versa. This effect is usually more pronounced for longer-term securities. Income from municipal bonds can be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the IRS or state tax authorities, or noncompliant conduct of a bond issuer.

Breckinridge believes that the assessment of ESG risks, including those associated with climate change, can improve overall risk analysis. When integrating ESG analysis with traditional financial analysis, Breckinridge’s investment team will consider ESG factors but may conclude that other attributes outweigh the ESG considerations when making investment decisions.

There is no guarantee that integrating ESG analysis will improve risk-adjusted returns, lower portfolio volatility over any specific time period, or outperform the broader market or other strategies that do not utilize ESG analysis when selecting investments. The consideration of ESG factors may limit investment opportunities available to a portfolio. In addition, ESG data often lacks standardization, consistency and transparency and for certain companies such data may not be available, complete or accurate.

Breckinridge’s ESG analysis is based on third party data and Breckinridge analysts’ internal analysis. Analysts will review a variety of sources such as corporate sustainability reports, data subscriptions, and research reports to obtain available metrics for internally developed ESG frameworks. Qualitative ESG information is obtained from corporate sustainability reports, engagement discussion with corporate management teams, among others. A high sustainability rating does not mean it will be included in a portfolio, nor does it mean that a bond will provide profits or avoid losses.

Net Zero alignment and classifications are defined by Breckinridge and are subjective in nature. Although our classification methodology is informed by the Net Zero Investment Framework Implementation Guide as outlined by the Institutional Investors Group on Climate Change, it may not align with the methodology or definition used by other companies or advisors. Breckinridge is a member of the Partnership for Carbon Accounting Financials and uses the financed emissions methodology to track, monitor and allocate emissions. These differences should be considered when comparing Net Zero application and strategies.

Targets and goals for Net Zero can change over time and could differ from individual client portfolios. Breckinridge will continue to invest in companies with exposure to fossil fuels; however, we may adjust our exposure to these types of investments based on net zero alignment and classifications over time.

Any specific securities mentioned are for illustrative and example only. They do not necessarily represent actual investments in any client portfolio.

The effectiveness of any tax management strategy is largely dependent on each client’s entire tax and investment profile, including investments made outside of Breckinridge’s advisory services. As such, there is a risk that the strategy used to reduce the tax liability of the client is not the most effective for every client. Breckinridge is not a tax advisor and does not provide personal tax advice. Investors should consult with their tax professionals regarding tax strategies and associated consequences.

Federal and local tax laws can change at any time. These changes can impact tax consequences for investors, who should consult with a tax professional before making any decisions.

The content may contain information taken from unaffiliated third-party sources. Breckinridge believes such information is reliable but does not guarantee its accuracy or completeness. Any third-party websites included in the content has been provided for reference only. Please see the Terms & Conditions page for third party licensing disclaimers.