So, what is net zero?

Investments team
28 June 2021

So, what is net zero?

If you’ve had half an eye on the investment world recently, you might have seen the phrase ‘net zero’ around a lot. It started making its way into common usage after the Paris Agreement on climate change in 2015, which was signed by 195 countries across the globe - including the UK - who have all pledged to keep the rise in global average temperature to well below 2°C above pre-industrial levels, and try to limit the increase to 1.5°C.

That’s all well and good. But what exactly does it mean to be net zero? Put simply, it means making sure any carbon that goes into the atmosphere in emissions (as carbon dioxide) is the same as the amount taken from it. A balancing act if you like. Carbon dioxide is by far the biggest culprit in climate change and is what’s usually meant when people talk about ‘gases’, although it’s not the only guilty party. It’s produced when things like fossil fuels are burned and in lots of manufacturing processes, such as cement production.

To achieve net zero, emissions of warming gases from homes, industry, transport, and farming have to be removed as far as possible. The emissions that can’t be avoided (residual emissions) will then have to be reduced by the use of carbon capture technologies, and offsetting them naturally through soil, peat, and trees. A big part of that will be changing the way we live, work, travel, and produce food.

Net zero and investments

You might be reading this and wondering what net zero has to do with investments. Well, when you invest in something like a pension fund, you’re often indirectly buying shares in companies that can make a direct difference to net zero being achieved or not. An example of this is investing in companies who have committed to becoming carbon neutral themselves, or those involved in climate decarbonisation, rather than high carbon-emitting companies, or companies not engaged in reducing their emissions.

Companies fitting into the second camp are more likely to be removed from investment funds and platforms, or have much a much smaller investment allocation available for investors. Those in the first camp will be looked upon far more favourably and are likely to see more investment and inclusion in funds.

This is important to companies, as selling shares can help them raise money and spread their risk, especially when they first issue shares at initial public offering (IPO) stage. And as they grow, it’s important they still have people investing in them, as it gives the impression the company’s doing well, which then makes a better investment for more investors.

Of course, investing in net zero friendly companies needs to be as potentially profitable as investing in not so net zero friendly companies. With investing there’s always a risk involved, so putting your money into well-established companies might seem sensible. But as governments continue to increase regulations pushing companies to change their business models around climate change and net zero, companies who grab hold of this idea are likely to be seen as a more attractive investment.

Major motor companies

Industries are starting to change their behaviour and investors will do the same, if they haven’t already. Major motor companies are already switching to electric only vehicle production ahead of the 2030 Government ban on petrol and diesel sales. Energy providers have also been offering carbon emission free electricity generated by wind power for a few years.

Adjustments like these will drive investor attitudes now and in the future. Indeed, electric and hybrid car sales are up and green energy suppliers are competing with traditional suppliers for customers more than ever before.

Our commitment to net zero

Scottish Widows are the first major UK pensions provider to target net zero across all our investments by 2050. We’ve also set ourselves a target to reduce the carbon footprint of our investments by 50% by 2030 to keep temperatures at 1.5°C of pre-industrial levels. We’re doing this because we’re shareholders in lots of companies and want to influence them to make positive changes on behalf of our customers.

Read more about our approach to net zero