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In order to comply with Paris Agreement targets, which aim to limit global warming to 1.5 degrees Celsius, the world will have to achieve carbon neutrality by 2050. How are governments and businesses preparing to deal with this challenge? Discussion with Mélanie Mortier, Senior Portfolio Manager at Banque de Luxembourg.

Carbon neutrality at the heart of corporate communication

Environmental targets are being firmed up and we are seeing more widespread commitments to achieve the objective of ‘zero emissions’, not only by governments but also by businesses. In a study published in November 2021, JP Morgan¹ estimated that 30% of the largest enterprises included in the Forbes 2000 ranking have ambitions of this type. As such, the Paris Agreement’s headline target of ‘net-zero’ appears to have become a watchword for many companies. Although this date is still a long way off for many, the commitment is a commendable one. However, the absence of a universal consensus definition makes it difficult to compare and assess ambitions. Accordingly, for some people this commitment is essentially based on carbon offsetting, whilst others take the view that a balance will need to be struck between CO2 emissions and the quantity absorbed.

The devil is in the detail

Approaches to communication in relation to this objective can differ significantly from one company to another. For instance, Google’s parent company Alphabet has been carbon neutral since 2007, and is committed to achieving zero carbon emissions by 2030. It is investing in the development of zero-carbon energy capacity of its own (wind power, solar energy, storage, etc.). It has been fully offsetting the amount of electricity consumed by it each year since 2017 and buys carbon offsets to cancel its carbon footprint². Microsoft is committed to removing more carbon than it emits by 2030, in particular through technologies such as afforestation, reforestation or carbon capture. However, upon closer examination it is apparent that Alphabet does not take account of ‘Scope 3’ emissions, i.e. emissions associated with usage of the company’s products, whereas Microsoft does consider these³. Indeed, the latter company has even created an internal carbon tax for its ‘Scope 3’ emissions. The devil is therefore in the detail. However, regarding another global issue, there have also been calls to consider these objectives in a more transversal and better coordinated manner. For instance, it is not realistic to expect each enterprise to offset its emissions through reforestation, as there quite simply is not an infinite amount of land available for this.

What is the way forward for the energy and industrial system?

The International Energy Agency (IEA) has published detailed modelling of the trajectory along which the energy and industrial system would have to develop in order to achieve the objective of net zero emissions by 2050, and to limit warming to 1.5 degrees Celsius. It primarily identifies approaches such as the faster electrification of industry, buildings and transportation, whilst at the same time de-carbonising electricity generation through wind and solar energy. Substantial gains could also be achieved in terms of energy efficiency. According to the IEA, hydrogen and alternative fuels also offer another option where electrification is not possible. It is interesting to note that the IEA’s net-zero scenario was recently referred to by a Dutch court when ordering the oil & gas giant Royal Dutch Shell to reduce its carbon footprint by 45% by 2030. These issues of renewable energy and energy efficiency are particularly captivating and need to be analysed in detail not only on a technical level but also in terms of valuation. Some companies have been causing a stir amongst investors due to their ambitious recovery plans in this area, or particularly optimistic prospects.

In order to achieve carbon neutrality by 2050, governments and businesses alike will have to take action to cut CO2 emissions or to capture carbon that has already been emitted. There is no doubt that the energy revolution is already underway, with companies now more committed to climate ambitions, which will result in more substantial changes over the coming years

¹ JP Morgan Cazenove, ‘The ABC of Corporates’ Net-Zero targets’, 8 November 2021


³ MSCI ESG Manager – Alphabet ESG rating Report

For more information

Mélanie Mortier
Senior Portfolio Manager

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