What is Net Zero
Former American President Barack Obama once said:
We are the first generation to feel the effect of climate change and the last generation who can do something about it.
Such somber, challenging words from influencers like him have driven the discussion around Net Zero or a carbon neutral planet.
Net Zero is one of the most relevant goals of sustainable finance – but before I throw around buzzwords, let’s clarify the fundamentals.
According to the latest UN IPCC (United Nations Intergovernmental Panel on Climate Change) report, climate change has caused substantial and increasingly irreversible damage to our planet. Extreme climate events are mounting and have exposed millions to acute food and water insecurity.
In 2019, a Tropical Cyclone killed more than 1,000 people across Malawi, Mozambique, and Zimbabwe. In 2020, Europe experienced its hottest year on record, causing heatwaves over large parts of western Europe and sweltering night-time temperatures. Heatwaves can dramatically impact human health and the natural environment and increase energy demands – in 2003, a summer heatwave in Europe resulted in the deaths of 35,000 people.
These incidents are grim examples of the impact of climate change. Given these examples, let’s look at what Net Zero means and how the financial sector plays a crucial role in achieving it.
The landmark Paris Agreement of 2015 aims to hold global average temperature to “well below” 2°C above pre-industrial levels and drive efforts to limit the temperature increase to 1.5°C. Emissions need to reach net-zero by 2050 if we have a chance to achieve this.
The United Nations describes Net Zero as cutting greenhouse gas emissions to as close to zero as possible with any remaining emissions re-absorbed from the atmosphere by, for instance, oceans and forests. In effect, the term refers to the balance between the greenhouse gases produced and the amount removed from the atmosphere. We reach net-zero when the amount added is no more than what we can remove.
Did you know that...
The European floods in July 2021 killed more than 220 people, mainly in Germany. The New York Times reported it as a “1 in 400-year event,” but now such an event is between 1.2 and nine times more likely to occur than a century ago.
Throughout 2019, 6.7 million people were displaced from their homes. Climate shocks especially hit Mozambique, Bangladesh, and countries in the Caribbean. (World Meteorological Organization, WMO – 2020)
According to GFANZ (Glasgow Financial Alliance for Net Zero), an alliance of financial firms, $32 trillion of investment is needed only over the next ten years ($125 Tr in-total) to avoid the worst physical impacts of climate change. Private actors could provide 70% of this financing offering enormous opportunities for investors. (2022)
Financial Sector is the Lynchpin
It is easy to visualize factory chimneys spewing thick black smoke into the atmosphere and link them to the climate disaster – but where does the financial sector fit in? It holds the key to this transition. Every industry relies on finance to provide money. This crucial position in the global economy means the financial sector plays a pivotal role in the race to limit global warming.
Banks, insurance companies, asset owners, asset managers, and other fiduciaries are increasingly taking a holistic approach to investment management and adding climate risks and opportunities to their decision making. The strong inflows, especially in sustainable products and funds, are evidence of this and reflect a substantial shift in society’s demand for sustainable business and growth.
The financing needed to completely overcome the climate disaster is mind boggling. According to the Glasgow Financial Alliance for Net Zero (GFANZ), it will take up to about $125 trillion to transform our economy and avoid the worst physical impacts of climate change; Public sources of financing, like governments and development banks, cannot provide it all.
Key economic sectors like agriculture, power, transportation, and construction account for 90% of the capital expenditure needed for the transition.
Therefore, private finance must fill the gap. Key economic sectors like agriculture, power, transportation, and construction account for 90% of the capital expenditure needed for the transition.
The financial sector cannot do this on its own, it needs support from other societal actors like policy makers and regulators to set the rules of the game, define a common taxonomy so that it can integrate sustainability factors into its own decision-making process.
Decisions on who it should lend money to and where investment should flow can drive the development of industry best practices ensuring that sustainability factors play an ever-increasing role in the global money flow patterns.
Financial institutions can steer this in various ways. One is by excluding organizations causing environmental harm and, at times, coupling it with an engagement & stewardship approach to influence ‘brown’ organizations to become less brown and, ultimately, green in their operations. Another one is positive investments in green and sustainable technologies like renewable energy and electric mobility. The third and broadest chunk of economy is the grey sector: neither strong contributors to emissions, nor a positive impact. By listening to the changing demands of investors, customers, and regulators, these companies will adapt to climate friendly processes and products.
Industries worldwide must use the window of opportunity this decade offers to avoid runaway climate change. The financial sector is answering Barak Obama’s call. Over 450 financial firms, including Allianz, from 45 countries have joined GFANZ, a global coalition of leading financial institutions focusing on Net Zero implementation for financial institutions. Their willingness to lead change is unprecedented – but then nothing less matches this generational challenge of racing to Net Zero.
This article reflects the personal views of the author.
