Amidst a year of headline risks, climate change continues to garner a significant amount of attention. An unprecedented heat wave across the UK and Europe sparked a string of wildfires – placing added strain on a region that’s navigating an energy crisis. Similarly, China experienced its worst heat wave in six decades, forcing its Sichuan province to temporarily shut down the factories of some of the world’s biggest electronics companies to lessen the burden of a power shortage. In California, the worst drought in 1,200 years has threatened the region’s agricultural sector. Meanwhile, floods have ravaged Pakistan, leaving a devastating path of damage and crippling its economy.

Undoubtedly, the climate headlines of today are concerning. But, what is perhaps more alarming are potential future implications if the narrative continues to deteriorate. To combat that risk, the Paris Agreement was adopted in 2015. The international treaty, which has been signed by more than 190 nations, seeks to avoid the worst impacts of climate change by keeping global warming to well below 2°C, and preferably to no more than 1.5°C above pre-industrial levels. According to some of the most reputable scientists, meeting this goal requires greenhouse gas (GHG) emissions to decline by approximately 45% by 2030 (relative to 2010 levels), and reach net-zero emissions by 2050 or sooner¹.

Annual CO₂ emissions, by region

Annual production-based emissions of carbon dioxide (CO₂), measured in tonnes (1860 - 2020). Source: Global Carbon Project, Our World in Data.

What does net-zero mean?

The term ‘net-zero emissions’ is about achieving balance between the GHG emissions we produce and those we take out of the atmosphere. In order for the world to achieve this level of emissions reduction, decarbonization will need to take place across all sectors, industries, and geographies. The United Nations (U.N.) has described the transition to a net-zero world as “one of the greatest challenges humankind has faced.”

The image below shows the main sectors where de-carbonization will need to take place.

Evidently, the net-zero transition has emerge as a key theme impacting financial markets as climate-related risks and opportunities impact companies in different ways. It’s also a topic that’s increasingly on the mind of Canadian investors. A 2021 survey by the Responsible Investment Association found that 85% of investors surveyed want Canadian corporations to set net-zero emissions goals. Almost eight in 10 stated they would like a portion of their portfolio to be invested in companies that are providing solutions to reduce carbon emissions³.

Integrating the transition to net-zero into investment decisions

RBC Global Asset Management (RBC GAM) supports the global goal of achieving net-zero emissions by 2050 or sooner. We also recognize and support the need to achieve a just and orderly transition to net-zero that promotes widely shared economic prosperity. To this end, RBC GAM measures and monitors how issuers are addressing climate change by considering:

• What are the company’s current GHG emissions? How does the company’s emissions profile compare to its peers on an intensity basis (e.g. revenue or standard output)?
• Has the company set comprehensive climate targets to address material financial risks due to climate change? Do they have a robust transition and action plan to meet those targets? Are they making progress in meeting their targets?
• Does the company have effective governance structures in place to manage climate-related risks and opportunities?
• Does the company offer transparent disclosure on the climate risks and opportunities they face? How are these integrated into strategic and financial decision-making?

Where climate change may present a financially material risk, we expect all issuers in which we are invested to establish credible targets and action plans aligned with achieving net-zero emissions by 2050 or sooner. We also expect them to demonstrate progress in meeting their commitments. We convey our views on climate change through thoughtful proxy voting, engagement with issuers and regulatory bodies, and collaboration with other like-minded investors.

Our approach to climate change

The impacts of climate change are systemic and unprecedented. They’re also already apparent. While climate change has the potential to affect the global economy, the economic impacts on specific markets, regions, and investments are complex, varied, and uncertain. Governments, companies, consumers, and investors each have a role to play in addressing climate change, and achieving net-zero emissions by 2050 or sooner. As asset managers and investors, and stewards of our clients’ assets, we believe considering climate-related risks and opportunities in our investment approach can enhance our long-term risk-adjusted returns.