As net zero efforts grow, so does the investment opportunity
Five years ago, few people had heard the term net zero – today, almost everyone is talking about it. But as large organizations acknowledge the importance of decarbonization, now comes the hard part of doing the many tasks, big and little, required to achieve net zero targets.
At the Milken Institute’s Global Conference, the Making Net Zero Possible panel moderated by Leslie Kaufman, Senior Reporter, Bloomberg Green, explored how prepared industry leaders are to achieve their sustainability pledges and what steps must still be taken to make net zero a reality.
The panel featured a range of global voices, from consultants to those who develop assets and deploy capital, including Dan Barclay, CEO of BMO Capital Markets, Will Jackson-Moore, Global Sustainability Leader, PwC, Zimi Meka, CEO and Managing Director, Ausenco, Derek Rozycki, Executive Director, Head of Responsible Investing, Mubadala Investment Company, and Rossitsa Stoyanova, Chief Investment Officer, Investment Management Corporation of Ontario (IMCO).
“I can’t think of a CEO or a board that we talk to anywhere where this [net zero] isn’t a top-three implementation item,” said Dan Barclay, building on his comments at the recent BloombergNEF Summit in New York in late April, where he outlined why ESG has a bright future. “They’re saying, ‘I will do something this year.’ And those conversations weren’t happening five years ago.”
BMO’s motivation to get in front of the climate conversation is threefold, Barclay explained: to be a good corporate citizen, to account for climate risks for its clients and to take advantage of the investment opportunity. “The investment that’s going to go into climate change and the change of the energy systems of the world is the biggest revenue opportunity I’ve seen in my lifetime,” he said.
Transitioning from Fossil Fuels
While the panel agreed that getting away from fossil fuel dependency and reducing energy consumption generally will be challenging, it’s telling that even Mubadala, a sovereign investor that manages a diverse portfolio of assets and investments in the United Arab Emirates and abroad, wants to see that their investment companies have a pathway to decarbonization.
“We integrate the concept of climate change and considerations of carbon into our investment lifecycle. We want to see a real agenda for progressing change and integrating climate into their decision-making over time, so we can have confidence that both from an economic and a social and climate impact over time that those portfolios will be moving in the right direction and driving the right economic returns.”
– Derek Rozycki
Executive Director, Head of Responsible Investing, Mubadala Investment Company
Companies need to work on many fronts to reduce their carbon footprints and not rely on one single solution, he added. That view was shared by PwC’s Will Jackson-Moore. “There is no easy magic bullet,” he said. In the short term, some organizations have resorted to buying carbon offsets to reduce their net emissions, he noted.
Public Companies Lead the Decarbonization Push
Due to greater exposure to regulators and public concerns around climate change, companies trading on public markets and the asset managers invested in them are currently ahead of private equity in terms of engagement and disclosure on climate issues, Barclay said, and that could result in a divergence in investment returns in the future. “The pace of change in a public entity will likely be faster than a private entity and that dynamic, will then enhance, over time, better returns,” he said.
Rozycki acknowledged that private companies are further behind on the decarbonization curve, but he’s optimistic that will change. “Something like 70 percent of private asset managers do not have any idea what’s going on with climate change,” he says. “But that’s changing really quickly.”
That’s where institutional investors can play a greater role, said Investment Management Corporation of Ontario’s (IMCO) Rossitsa Stoyanova. “We have more influence on the private side because we’re on the board and can influence the company,” she said. “We make sure that the company has a realistic plan to decarbonize, and we help them to decarbonize.”
Encourage Change Through Investment
The panelists, however, warned against creating corners of the investment universe “where dirty assets go to hide,” as Rozycki put it. It’s important for engaged investors and funds to stay invested in all sectors, he said.
“We have a strategy where we are ready to acquire assets that are dirty, or carbon-intensive, as long as we have a realistic investment thesis on how to decarbonize them. And, actually, that’s a value-creation thesis,” offered Stoyanova. In one example, IMCO bought a company that provides backup diesel power generation to the U.K. power grid that is now converting to utility-scale battery storage.
Governments likewise have to take an all-in approach to net zero, combining incentive “carrots” with regulatory “sticks” to get companies and consumers to act, the panel agreed. For instance, producing cement for the building sector alone accounts for 8 percent of global emissions, noted Ausenco’s Zimi Meka. If you are the head of a major cement manufacturer, the only way to get around this is to come up with viable alternative processes – which requires government financial assistance, he argued.
“That transition can’t happen with a stick,” he said.
Spending on Net Zero Is Intensifying
Barclay sees government funding as crucial to setting a “virtuous flywheel” in motion that will come to put net zero at the core of business objectives. While the U.S. was lagging on this front, the Inflation Reduction Act (IRA) has put it back on track to become a global leader.
“You think about the IRA today – US$300 billion,” he said. “They think it’ll take 10 years [to deploy]. My bet is they spend it all in three, and then they’ll double down. The rapid pace of change you’re going to see in the U.S. is going to be three, four, five times the pace of change in Europe,” said Barclay.
There are several challenges that will slow net zero implementation, including regulatory inertia, a lack of critical minerals for electrification and a lack of common reporting standards for emissions in the investment industry.
“If you can’t measure it, you can’t reduce it,” Stoyanova lamented.
“The biggest barrier is market structure,” Barclay said, citing the absence of electrical charging and hydrogen refueling infrastructure on Canadian highways. The legacy transportation industry, he noted, simply isn’t set up to meet that demand.
A lot of these barriers can be addressed under the right conditions, though – chief among them market pricing and sheer necessity. Barclay pointed to Europe’s rapid response in the face of Russia’s invasion of Ukraine and a more than doubling of energy costs.
“Renewables, LNG, all those things that used to take a decade, they got done in a year,” he said.