Six insights on investing for net zero

Divesting from emissions-intensive sectors and companies seems to be the easiest solution to bring investments in line with the Paris Agreement’s goal to bring global greenhouse gas emissions to net zero by mid-century. However, we have yet to see evidence that divestment is having a strong impact on emissions in our economies.

Investors may achieve far more by using their financial power to advance the decarbonization of the sectors responsible for the largest share of emissions: oil and gas, agricultural commodities, steel and cement. Large, very disruptive changes need to be initiated in the next decade to put these four high emitting sectors on track to decarbonize at a pace consistent with the Paris Agreement. That’s because:

• For steel and cement, there are still no commercial-scale sites for zero, or close-to-zero, emissions production, although the first sites are under development.
• In the agricultural commodities sector, emissions are poised to increase significantly.
• In the oil and gas sector, there is a need for large and consistent annual decreases in production volumes, but production is currently on the rise.

Investors willing to engage with these sectors have an enormous opportunity to influence the level of emissions in the real economy. To do so, they need to put coordinated pressure on companies and other actors to initiate serious decarbonization transitions. This requires an understanding of:

• the actions that high-emitting companies and sectors should be taking to decarbonize production processes or to shift business models
• policies and other system conditions necessary for companies to succeed with their decarbonization strategies, and
• when it appears that sectors and companies can adopt credible transition strategies that investors can support, and when other strategies, such as divestment, are likely to be more impactful.

The results of such an approach may take time to materialize, but what matters most is to get companies to commit to a long-term decarbonization agenda – to fundamentally change their production systems and business models, and demonstrate that they are implementing these changes.

These issues are examined in detail in the recent report What Does it Take to Achieve Net Zero? Opportunities and Barriers in the Steel, Cement, Agriculture, and Oil and Gas Sectors. This brief presents a summary of six key insights from the report on the following points:

• Long-term transitions require immediate action
• It is crucial for investors to engage with value chains
• Interventions should promote sector-wide transitions
• Investors need to better understand their leverage points
• Divest from the oil and gas sector, or engage with it?
• Investors could push for more than trajectories and targets.