As an investor willing to play its part, the IEA NZE scenario provides a number of reference points and target values that can be used in:
– stewardship / engagement activities,
– investment processes,
– investment solutions.
In a subsequent paper to follow, we will delve deeper into the mechanics of integrating net zero for investors, across the entire value chain: asset allocation, investment, reporting and engagement. Here, we focus on implications for our engagement activities.
Engaging for corporate net zero alignment
Interestingly, the IEA Net Zero scenario was the reference used by a Dutch Court recently to order the oil & gas major RD Shell to cut its carbon footprint by 45% by 2030: a number ‘aligned’ with the emissions cut required in the IEA Net Zero scenario for all fuels (including coal).
While interesting, we have general reservations with such a one-fits-all approach that consists in translating an absolute reduction requirement at a systemic/macroeconomic level onto corporates. We believe that efforts deployed by corporates need to be assessed within its specific business and geographical context. This is why we prefer using sector specific indicators and regional pathways, whenever available, to inform our engagement with corporates.
In that regard, the IEA scenarios offers many indicators to test the level of alignment of corporates’ decarbonisation targets and practices. This includes:
– New sector decarbonisation pathways for key emitting sectors.
– Target levels for key decarbonisation levers by sector: eg, low-carbon technology penetration rates, annual energy efficiency improvement rates.
– Economic assumptions for commodity prices (eg energy, CO2) and activity growth.
New 1.5°C-aligned sector decarbonisation pathways: raising the bar
Sectoral carbon-intensity pathways remain one of the most useful tools available currently to benchmark the level of ambition of corporate decarbonisation targets.
Positioning corporate decarbonisation targets against these pathways allows us to identify companies lagging behind and to concentrate our engagement efforts.
While there has been a bunch of net zero 2050 pledges made by corporates over the past years, we expect companies to 1) set interim targets, that 2) converge towards the sectoral average.
The example of the power company Z is particularly noteworthy as it shows that the risk of compromising the overall sector efforts can also come from companies with a current better-than-average CO2-intensity if they have too soft decarbonisation ambitions.
Amundi supports the Business Ambition for 1.5°C campaign of the Science-Based Target initiative (SBTi), and will keep advocating the use of sectoral decarbonisation approach (SDA) for target setting, once the SBTi adds new 1.5°C-aligned sector pathways.
‘Alignment’ does not say it all: towards contribution assessment
The ‘alignment’ assessment exercise is useful but cannot say it all. As we seek CO2 reductions in the real economy, equally important in our view is how our investees intend to ‘align’ itself. Indeed:
– A corporate can ‘align’ itself via M&A actions to reshape the CO2-intensity of its portfolio of assets. While such actions can be useful to de-risk portfolios from an energy transition standpoint, it has virtually no direct contribution to global net zero efforts as problematic assets only change hands.
– A corporate can appear perfectly aligned today while at the same time not doing any additional contribution to global net zero efforts. As highlighted earlier in this paper, the IEA Net Zero is largely about investing in low-carbon solutions.
The referenced media source is missing and needs to be re-embedded.
Reference points and target values in the IEA NZE can be used to assess the contribution to this scenario, both for sectors with and without sector specific decarbonisation pathways.
Setting dividing lines: what is needed, what is not needed and what is needed not to have
We believe that for the transition to net zero to be orderly, it has to be demand-driven. This requires to ensure a timely retrofitting or repurposing of the existing stock of energyconsuming assets on the one hand, and that new energy-consuming assets being developed match stringent low-emissions criteria, on the other hand.
Through our engagement activities, we want to ensure that companies:
- contribute to the development of the low carbon solutions needed on a fair share basis, and
- do not compromise the net zero efforts by developing assets that will lock in unabated fossil fuel demand and generate carbon emissions outside the net zero carbon budget, or by missing an opportunity to retrofit or repurpose existing assets.
In that regard, we differentiate three types of assets or actions discussed in the IEA NZE, as follows:
1. What is needed: the scenario lists asset types that need to be scaled up to deliver the required CO2 reductions. This includes for instance the development of wind and solar, electric vehicles, carbon capture & storage, green and blue hydrogen, or zero-carbon-ready buildings. This also extends to practices such as voluntary limiting business flights. The development of such assets and practices directly positively contribute to the NZE scenario. Therefore, we will keep pushing companies to contribute to their wider development or adoption.
2. What is necessary not to have: the IEA NZE scenario lists a number of developments that it is necessary to avoid if we want to keep the world on track with the remaining carbon budget. This category typically includes new approvals for unabated coal plants as early as this year (2021), but also new fossil fuel boilers from 2025, non-LED lighting solutions from 2030 and new cars powered by combustion engines from 2035. Some countries have starting adopting consistent public policies. For instance in the UK, all new homes will be banned from installing gas and oil boilers by 2025, and a ban on the sale of new petrol and diesel cars by 2030 was also announced. The development of such assets beyond the prescribed timeline directly compromises the net zero scenario designed by the IEA by locking in fossil fuel demand outside the remaining carbon budget. In the absence of local regulations, we therefore expect both sponsors and manufacturers of those assets to align with net zero recommendations. Consistent with this approach, Amundi has excluded from its investment universe coal developers since last year. Our engagement is focused on stopping the development of such assets and pushing corporates to review their plans.
3. What is not needed: as a second derivative of the constraint placed on the demand, the IEA NZE scenario shed light on some assets whose development would not be needed if energy-consuming sectors achieve the required transformation. This includes new oil and gas greenfield developments and new natural gas liquefaction plants for instance. Unlike the precious category, the development of such assets does not directly compromise compliance with the carbon budget. However, these developments still represent a potential wasted opportunity to allocate capital towards low-carbon solutions and a potential risk of stranded assets. Our engagement therefore seeks to push companies to review the financial attractiveness of such projects using assumptions consistent with a net zero scenario.
Economic assumptions for careful business planning to avoid stranded assets and/or locking in emissions
As new assets are being built and existing assets are being upgraded, it is key to ensure that today’s investments decisions avoid locking in future carbon emissions outside the net zero 2050 budget. The IEA estimates that 30% of the key emitting assets in the heavy industry will face critical retrofitting/replacement decisions by the end of the decade. We therefore encourage corporates to stress test their investment and business planning decisions using the economic parameters of the IEA NZE. This includes a combination of fuel and carbon prices and sectorial activity growth assumptions.
Alignment of lobbying practices
The IEA lists a number of key policies needed to drive emissions reductions such as the introduction of CO2 prices in all regions, renewable fuel mandates, efficiency standards, or the phase out of fossil fuel subsidies.
Through investor initiatives or on a standalone basis, we will keep advocating for more ambitious policies. As we believe that corporates have a pivotal role to play too, this is also part of our climate engagement with them. We believe that it is important that corporates on the one hand withdraw their support to initiatives that oppose or intend to water down relevant low-carbon policies, and on the other hand disseminate best practices and alleviate fears by providing feedback to policymakers across the world on their experience in markets/countries with the most advanced policies.