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Key takeaways

  • Investors are becoming more interested in companies with clear climate objectives, such as achieving net-zero emissions in their operations.
  • Net-zero portfolios can look different for each investor. Some strategies can include thematic investing, which may exclude certain sectors, such as fossil fuel, from portfolios. Others can focus on investing in companies with clear net-zero targets.
  • Transparency is important in helping investors understand whether their portfolios are aligned with net-zero targets.

The United Nations (U.N.) has described the transition to a net-zero world as “one of the greatest challenges humankind has faced.” The Paris Agreement set the challenge of keeping global warming to no more than 1.5°C above pre-industrial levels. That means reducing emissions by 45% by 2030 and reaching net-zero by 2050.

Countries around the world are on different tracks to achieve that goal. As the U.N. says, it “calls for nothing less than a complete transformation of how we produce, consume and move about.” The pursuit of net-zero is also changing the investing space.

“Many investors of all stripes are really interested in and concerned about the impact of climate change on their investments, and how to support the global goal of achieving net-zero emissions by 2050.”

Maia Becker, Senior Director of Corporate Governance and Responsible Investment.

The term “net-zero emissions” is about achieving balance between the greenhouse gas (GHG) emissions we produce and those we take out of the atmosphere. The concept is also called carbon neutrality.

It’s important to note that net-zero doesn’t only mean producing no emissions; while emissions can still be produced, they can also be offset by processes or actions that reduce them.

At RBC GAM, we integrate climate change into our investment approach, and provide transparency on how portfolios are aligned to net-zero. As a result, Canadian investors are increasingly able to choose investment solutions that take into consideration the impact of climate factors. This can enhance long-term risk-adjusted returns.

Given the wide number of choices available, investors can work with their advisors to choose the solution that best fits their investment objectives and views around net-zero.

Thematic portfolios can have positive and negative screening – for example, ruling in or out certain companies or sectors.

Certain asset managers apply specific exclusions, such as thermal coal, as their primary means of reducing emissions within a portfolio. However, this approach doesn’t necessarily mean that a portfolio is aligned to net-zero, or that the companies within the portfolio are on a pathway to net-zero.

We invest in companies that have set targets and action plans for how they will achieve net-zero in their own operations. We also highlight engagement with companies around their climate strategies, to help steer them toward net-zero.

Some asset managers also monitor and report on the temperature pathway of investments, to track if they meet the Paris Agreement’s goal of reaching “below 2°C.”

Or, strategies can employ a mix of all of the above.

The diversity of approaches is made more challenging given the lack of clarity of what net-zero means across industries, including the investment industry itself.

“This is where there is more need for standardization and consistency about how you measure the net-zero alignment of a portfolio,” Maia says.

The industry is making progress on this front. The Science Based Targets initiative (SBTi) is driving climate action in the private sector and provides the guidance and tools for companies to set net-zero targets. In March, SBTi launched the world’s first standard for science-based net-zero targets in the financial sector.

Focus on education and transparency

Investors can look to asset managers to provide educational materials, thought leadership and detailed reporting on climate change issues and net-zero alignment of investments.

RBC GAM recently issued our latest Task Force on Climate-related Financial Disclosures report, which also affirmed our net-zero ambitions.

“As part of our investment process, we integrate material climate change, measure carbon emissions and net-zero alignment, engage with companies on their climate targets and actions plans, and report on key climate metrics. This is described in Our Approach to Climate Change.” Maia says.

So, is a net-zero portfolio possible? Perhaps the more relevant question is how can you translate your goals into the appropriate net-zero strategies and solutions?

“Transparency is paramount,” Maia says. “With growing clarity on what it means to invest with the goal of achieving net-zero emissions, we can start to determine how we can actually achieve it.”

“As we move through this process, it is critically important that asset managers provide clear and transparent disclosures and data, so that they help ensure investors’ objectives are aligned with their investment portfolios.”

Work with your advisor to explore responsible investment solutions that meet your goals around net-zero.

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