Beyond Net Zero The Broader Perspective Needed in Sustainable Investing

A company's current impact refers to the existing environmental footprint it creates through its operations, supply chain, and products or services. On the other hand, future impact pertains to the potential environmental effects that a company can exert based on its forward-looking strategies and commitments.

When looking at net-zero pledges, they typically refer to a company's future impact. For example, a company might commit to achieving net-zero emissions by 2040, implying a future positive effect. However, this doesn't necessarily account for its current impact. A company with substantial greenhouse gas (GHG) emissions today but a net-zero pledge for the future might be deemed 'sustainable,' overshadowing companies that have lower emissions today but lack a net-zero pledge. Thus, focusing on net zero can risk overlooking the existing environmental footprint of companies.

Focusing solely on net impact can create a skewed view of a company's environmental performance. Net impact typically refers to the balance between a company's positive and negative environmental effects. Yet, it can be misused to offset substantial negative impacts with positive initiatives, resulting in an ostensibly 'net-zero' outcome. Carbon offsets should only be used as a last resort to reduce carbon emissions because they do not address the root causes of emissions and can create a false sense of progress without promoting real sustainable changes.

A company might, for example, continue with high-emission activities while investing in carbon offset projects to achieve a 'net-zero' status. While carbon offsetting can be part of the solution, it is not a panacea. Additionally, carbon offsets carry a level of uncertainty in their effectiveness due to challenges in accurately establishing additionality, addressing leakage and permanence issues, and ensuring credible monitoring and certification.

While the net-zero movement has galvanized unprecedented climate action, we can’t consider it as a silver bullet for identifying environmentally responsible companies for investment purposes. A comprehensive approach that considers both current and future impacts, looks beyond just net impact, and assesses a broad range of environmental factors is critical for responsible investing. Such an approach can help investors make more informed decisions that align with their sustainability objectives and contribute more effectively to the global transition towards positive social and environmental change.