Race is on to achieve net zero

Jenn-Hui Tan

Mar 17, 2021 – 12.01am

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This content is produced by The Australian Financial Review in commercial partnership with Fidelity International.

European companies are leading the way to net zero, according to our global survey of Fidelity International analysts. But with sustainability continuing to climb the agenda in North America and elsewhere, there is hope that other regions could catch up.

The race to net zero is on. Almost a quarter of all companies will be carbon neutral by the end of this decade, according to Fidelity International analysts.

To achieve this, companies must slash scope 1, 2 and 3 emissions. These include direct emissions from the company’s own operations and energy use as well as indirect emissions up and down their value chains.

Looking further out, analysts believe that 43 per cent of firms will get to net zero by 2040 and 66 per cent by 2050.

Our forecasts are based on companies’ current plans, so we expect them to be revised higher in the coming years, as regulations tighten, new chief executives take the reins, and robust environmental, social and governance (ESG) practices become a baseline for attracting investor capital.

European companies are currently most advanced, with our analysts estimating that 30 per cent of firms will be carbon neutral by 2030. This highlights how embedded sustainability is in the region.

As in last year’s survey, Europe once again has the highest proportion of analysts reporting growth in ESG activity at a majority of companies.

US could close sustainability gap with Europe

Other regions could eventually close the gap with Europe. New US President Joe Biden was elected on an ambitious climate platform that seeks to decarbonise US power generation by 2035.

Indeed, sustainability issues continue to climb the agenda at North American companies.

The proportion of analysts reporting an increased ESG focus at a majority of their companies has risen to 58 per cent, up from 49 per cent last year. President Biden’s changes will give these efforts a boost but there is still some way to go.

This may reflect a recent US rule change that discourages investment managers from considering non-financial factors, such as ESG, in decision-making. Expectations are high that this will now reverse, and sustainability considerations will form part of a manager’s fiduciary duty.

Corporate focus reverts to pre-Covid priorities

The past year has radically reshaped many things, companies included. Over that time, we have been tracking shifts in corporate priorities. In our November 2020 monthly survey, we asked our analysts to rank their companies’ priorities and compare them to those of January 2020.

Their responses revealed that social factors such as employee welfare and external stakeholders had become more important during the pandemic.

In the 2021 annual survey, we asked our analysts to rank the same priorities for their companies over the coming year.

The results show corporate focus in 2021 shifting back towards the pre-pandemic priorities of growth investment, shareholder returns, and mergers and acquisitions, while social factors are sliding down the corporate agenda.

This suggests that companies’ ESG strategies are strongly influenced by changes in government policy and investor behaviour, as well as the current discourse.

Environmental factors are likely to take centre stage again among ESG considerations as the COVID-19 crisis recedes, but the survey suggests social issues will continue to matter, not least as climate-driven risks start to have a bigger impact on populations and lay bare social divides.

Jenn-Hui Tan is global head of stewardship and sustainable investing, Fidelity International.